What to do with gift cards, layaways when a retailer closes

The lackluster holiday season and deepening recession will take a toll on retailers around the country. Experts are predicting the worst rash of store closings in 35 years.

Besides seeing a favorite store close for good, consumers may be left with worthless gift cards, warranties and service contracts. Or what happens if you've got an item on layaway at a bankrupt store, or put down a deposit on a new appliance?

Here are some questions and answers about rights consumers have if their retailer files for reorganization or goes out of business.

Question:

Will my gift cards lose their value in a bankruptcy?

Answer:

Legally, consumers who hold gift cards become unsecured creditors of the company, said Brian Shaw, a Chicago bankruptcy lawyer and a board member of the American Bankruptcy Institute in Alexandria, Va. That means they are second to last in line to get their money back, just ahead of shareholders.

Practically, however, if the retailer stays in operation as it reorganizes, it can honor gift cards to keep customers happy as long as the company can afford it and gets court approval. But if the retailer goes out of business, it is less likely consumers will be able to recoup all their money.

The Federal Trade Commission is studying a proposal to require merchants to place money from gift-card sales in a trust to protect consumers.

In the meantime, if you have cards, use them right away. If you plan to buy gift cards, make sure the retailer is not in trouble.

Q:

What happens if I put down a deposit for furniture and the retailer goes belly up before it is delivered?

A:

You could get your money back - up to $2,425. Legally speaking, you are an unsecured creditor, but you have a priority claim ahead of gift-card holders in Bankruptcy Court.

Q:

What will happen to warranties and service contracts purchased at a retailer that files for bankruptcy protection?

A:

Manufacturer warranties will not be affected, and extended warranties could still be serviced if they are backed by a third-party company. But extended warranties - as well as service contracts - backed by the retailer will be in jeopardy.

Q:

I've got a balance on a credit card from a bankrupt store. Do I need to pay the bill?

A:

If you received the goods and services, pay your bill, Shaw at the bankruptcy institute said. Moreover, many stores offer Visa or MasterCard cards, which are issued by banks. They will report you to credit agencies and hire bill collectors if you do not pay.

Q:

How can I protect myself in advance?

A:

Use credit cards. Once you pay with cash, debit cards or checks, the retailer has your money - and you're now an unsecured creditor in Bankruptcy Court if you want to get a refund. With a credit card, you can dispute the charges through the issuer.