Gift Card Warning: Check Retailer's Health

What About Service Contracts?

With many retailers teetering on the edge of insolvency, consumers who purchased additional product protection and service plans remain worried that their coverage may cease if the company fails. So what happens to these plans? Find out more.

Two-thirds of shoppers plan to give gift cards this holiday season, making those little plastic cards the second most popular gift after clothes, according to a national survey by Consumer Reports.

But some experts warn that these gifts could be worthless if the current trend of retail bankruptcies continues.

Circuit City, which filed for bankruptcy protection last week, is still honoring its gift cards, as is Linens 'n Things. But other bankrupt companies, such as The Sharper Image, simply have stopped accepting the cards.

A couple of years ago, the cable company where Kim Handloff works was offering bonuses in the form of gift cards. She had been planning to buy her boyfriend an expensive telescope, so she took her $1,500 bonus in gift cards from The Sharper Image. But she held on to them. In February, The Sharper Image filed for Chapter 11 bankruptcy protection and eventually stopped accepting gift cards.

"I basically have about $1,500 worth of pieces of plastic that are going to get me absolutely nothing," says Handloff.

Now she is angry and fed up with the whole concept of gift cards.

"I should have used them the second I got them," Handloff says. "It taught me a lesson and actually made me go through my wallet and look to see if I had any other gift cards I was holding on to. Because at this point, I never want to have a gift card, because you never know if it's going to be good the next day after you get it."

She isn't the only one in this bind. When The Sharper Image closed its stores, customers were holding $66 million in gift cards they couldn't use, says Brian Riley, a research director for TowerGroup, a company that specializes in financial services research.

"When a bankruptcy filing occurs with a retailer, the consumer is truly considered an unsecured creditor in the bankruptcy, and thus [the gift cards] have no value," Riley says.

He notes that bankruptcy filings in retail tend to peak in January. So if you do get a gift card for the holidays, use it as quickly as possible, he says, or it may become nothing more than a flashy ice scraper.

Consumer Reports calls gift cards "the gift that keeps on taking." Even if the specter of bankruptcies were not hanging over the retail industry now, senior editor Tod Marks says he doesn't suggest people give gift cards.

"Even though your intentions might be good to give such a gift, the fact is it may not play out the way you wanted for one reason or another," Marks says.

A quarter of gift card recipients still haven't spent gift cards a year after receiving them, according to a Consumer Reports survey. And a majority of people say they end up spending more than the value of the card once they get to the store.

Leverage, an online seller of gift cards, is capitalizing on consumer concerns about bankruptcies by guaranteeing the cards they sell. They instituted the guarantee after The Sharper Image bankruptcy, says co-founder Jennifer Mathe. If a company files for bankruptcy within 90 days of a card purchase, she says customers can trade the card in for something different.

Common sense may be the best guide for consumers, says Kwame Kuadey, CEO of GiftCardRescue.com, an online company that buys and sells unused gift cards. He says if a company is laying people off and closing stores, that's probably not the best place to buy a gift card.

Consumer advocates say gift cards come with all kinds of conditions. And they shouldn't be thought of as money in the bank.

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