Beware the gift card, in bankruptcy-vulnerable era

On Wall Street, the talk is about how "toxic debt" threatens banks and lending. On Main Street, shoppers should start thinking about "toxic" gift cards from companies that could go bankrupt.

It's not an idle worry.

Shoppers spent an estimated $26.3 billion on gift cards at retailers last Christmas season, compared with $24.8 billion in 2006 and $18.5 billion in 2005, according to the National Retail Federation.

"I am very wary of gift cards this year and do not plan to use any of them at all during the holiday season. I simply do not trust the companies unless they put on a label saying that they are fully returnable at face value," said Richard Glassock of Laguna Niguel, Calif.

Already, some big retailers, including Circuit City Stores Inc., Sharper Image Corp., and the Bombay Co. Inc., have filed for bankruptcy protection, leaving holders of gift cards with millions of dollars of what the Bankruptcy Court considers unsecured debt. Sharper Image and Bombay have since closed.

Consumers Union said that when Sharper Image filed for bankruptcy protection this year, it left an estimated $20 million of unused gift cards and maybe as much as $40 million when merchandise certificates and related promotional cards were included. At first, Sharper Image said it would not honor the credits. Later, it successfully petitioned the court to allow it to accept gift cards - if consumers spent twice the value of the gift card on a single transaction.

"That wasn't such a good deal, and who knows if anybody used their cards that way," said Anthony Giorgianni, associate editor of Consumer Reports, which is published by Consumers Union.

In August, home-furnishing retailer Bombay, which closed 388 stores, won approval from a U.S. bankruptcy judge to pay off holders of gift cards 25 cents on the dollar.

Holders of gift cards could lose more than $75 million just from store and restaurant closings in 2008, said Brian Riley, senior analyst at the Tower Group Inc., a consulting company.

"The only way that number will change is up," Riley said.

In September, a coalition of organizations asked the Federal Trade Commission to protect shoppers from losing money on gift cards when retailers file for bankruptcy protection. It said retailers should be required to place money from gift-card sales in a trust account that would be used to honor the cards if the merchants continued operations under the protection of the Bankruptcy Court.

FTC spokesman Mitchell J. Katz said the agency had received the petition and was considering its response.

A company in bankruptcy can petition the court to allow it to continue to accept its gift cards, but the bankruptcy judge has the option of rejecting such a petition, which would leave the cards worthless, Giorgianni said.

In cases in which a bankrupt company is reorganized or sold and remains a continuing business, most owners will receive court authority to honor the cards as a way to maintain goodwill with consumers and drive customer traffic, said Marty Zohn, a bankruptcy lawyer with Proskauer Rose L.L.P. in Los Angeles.

Consumers Union is recommending that people avoid giving gift cards this Christmas season.

"If you don't know what gift to buy, just give cash," Giorgianni said. "It's something that never expires."