What to Do With Your Gift Card When a Store Goes Bankrupt

Your gift card might be in Chapter 11.

Last Christmas, a Sharper Image SHRPQ.PK gift card could buy a home breathalyzer machine, a digital photo-displaying key chain or a trip to a zero-gravity chamber in Nevada.

Two months later, the same gift card couldn't be used for anything -- except maybe a bookmark. That is because Sharper Image filed for bankruptcy Feb. 19 and immediately stopped accepting its own gift cards. The gizmo retailer's woes are evidence of a growing hazard for consumers: gift cards that become worthless when a company goes broke.

Bankruptcies at big national chains like furniture sellers Levitz Furniture and Bombay & Company left those holding gift certificates in the lurch last fall.

Analysts say the faltering economy will spell even more losses this year: Those with plastic promises in their wallets will lose at least $75 million in 2008, according to an estimate by the research firm TowerGroup. What's behind this huge number? The swan-diving economy is intersecting with the surging popularity of gift cards. According to the National Retail Federation, consumers spent $26.3 billion on gift cards during the last holiday season; that's second only to clothes in gift popularity.

"We've seen failures in the economy before, but there wasn't necessarily a lot of gift card use at those times," says Tina Henson, founder and CEO of Plastic Jungle, a Web site that lets people buy, sell and trade gift cards.

Consider Linens-n-Things, the home décor store teetering on the brink of bankruptcy. (Linens-n-Things isn't public so we can't give you the ticker but GE'sGE Commercial Finance unit is the lead agent on a $700 million revolving credit facility to the company.

Americans are walking around today with company gift cards totaling $42 million, says Brian Riley, a senior analyst at TowerGroup. If Linens-n-Things files for bankruptcy tomorrow, the cards will go to a zero balance. A person with a $25 gift certificate joins the long line of creditors seeking repayment and individual cardholders are almost always at the back of the line. "Your chances of getting paid as a consumer are just about nil," says Riley. "If they could afford to pay that far down the food chain, they wouldn't have filed for bankruptcy."

How can you protect yourself? Experts advise consumers to behave as though every company is about to go belly up. "The number one thing is to spend the gift cards as quickly as possible," says Jennifer Mathe, co-founder and CEO of Leverage Card, a Web site that lets consumers manage and trade gift cards.

In recent years, most chains have bowed to public pressure and eliminated expiration dates and fees for gift card, but without a firm deadline, many shoppers forget to use their gifts. "People get a card and say, 'Oh, Linens-n-Things, well, I don't need sheets right now, so I'll hold on to this for six months,'" Mathe says.

That wait can mean lost or forgotten cards or company bankruptcy.

One strategy is to trade a card you don't need for one you can use immediately. Various Web sites offer cardholder swaps where, say, a $100 Victoria's Secret gift card can be exchanged for a $100 certificate to Amazon AMZN. "People need to look at these cards as cash and figure out how to monetize them as soon as possible," says Henson. "Don't put them in a drawer."