Know your rights if a store goes bankrupt: don't get cheated if a retailer shuts its doors for good

Black Enterprise, Nov, 2008 by Tamara E. Holmes

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WHEN VERONICA WATTS, 39, OF Bowie, Maryland, spent $300 on gift cams for herself and a friend at a local spa, she waited about six months for the perfect occasion to cash them in. But she was a few months too late: The spa had shut its doors. "They didn't leave a forwarding address," she says. "My money was just gone."

With a weak economy causing retailers such as Linens 'n Things, The Bombay Co., and Sharper Image to file bankruptcy in recent months, Watts' experience is becoming more common as consumers are stuck with unused gift cards, says Brian Riley, senior analyst for the Needham, Massachusetts-based research firm TowerGroup. In fact, the Sharper Image bankruptcy filing alone led to about $60 million in gift card losses, TowerGroup estimates. If you've paid for warranties or service contracts, made a deposit on an item not yet received, or left products on a business's premises to be serviced, you could lose money or goods if a store goes bankrupt before the transaction is complete.

If a business files for bankruptcy, there's only a slim chance of cashing in a gift card or having a warranty or service contract honored. Consumers who are owed products or services become unsecured creditors, says Donald L. Bell, a bankruptcy attorney in Upper Marlboro, Maryland. Under bankruptcy laws, unsecured creditors recoup their losses only if money remains after the company has paid off secured creditors--those whose claims are secured by the business's assets--as well as administrative costs and employee wages. But that doesn't mean you shouldn't try to recoup your losses. "Consumers need to assess how much money they would lose," says Russ Heimerich, a spokesman for the California Department of Consumer Affairs. "If I have a $5,000 purchase with a furniture store, I'm going to pursue that. But if it's $5 on a gift card, maybe not, because it's just not worth the time and energy."

IF A STORE THAT OWES YOU HONEY OR SERVICES GOES BANKRUPT, HERE ARE SOME STEPS TO TAKE:

* Contact the store immediately. Find out firsthand whether the company will honor your gift card or service contract. You might have better luck if the company files for bankruptcy under Chapter 11, which is a reorganization or restructuring of debts, than if the company files under Chapter 7, which is a total liquidation of assets,

* Locate the presiding bankruptcy court: If the store won't give you your money or services, go to www.uscourts.gov to find the bankruptcy court overseeing the case. If it's a local business, the court will be in that region's jurisdiction. If it's a national chain, the bankruptcy will likely be filed in the jurisdiction of the company's headquarters or in the place of incorporation.

* File a Proof of Claim. Submit evidence of the debt, such as copies of receipts or service contracts when filing a document, called a Proof of Claim, with the bankruptcy court. There is a deadline, typically 90 days after proceedings start, so file immediately. You can download the form (Form B10) at www.uscourts.gov.

PROTECT YOUR CASH

Don't wait for a store to declare bankruptcy before taking these precautions:

* Use gift cards immediately. With an uncertain outlook for many retailers, don't save your gift cards for a rainy day, says Riley. "Use them right away."

* Give prepaid debit cards. Instead of giving loved ones gift cards to a specific retailer, buy prepaid Visa or MasterCard debit cards.

* Use a credit card. If you have to make a deposit, use a credit card, which, depending on your card agreement, may waive the fee if merchandise is not received, says Alison Preszler, a spokeswoman for the Better Business Bureau.

* Sell or swap gift cards. If you can't use a gift card because a national chain closed the store in your neighborhood, go to www.giftcardbuy back.com or www.swapagift.com to trade yours for cash.