Bankruptcies sapping value of gift cards

Several years ago, in one of our client newsletters, we warned people about expiration dates which sapped the value of gift cards. Last year, we reported on a settlement reached by the Federal Trade Commission with Kmart about fees it was charging on gift card users (See Gift card settlement). Today, we have to warn you about gift cards that lose their value when a company goes bankrupt.

As reported in today’s Boston Globe, there’s a new realization that holding a gift card from a troubled retailer is like having a bank account without FDIC insurance. Already some big retailers, including Sharper Image and Bombay Co., have filed for bankruptcy protection, leaving gift card holders with millions of dollars of what the Bankruptcy Court considers unsecured debt. In 2008, gift card holders could lose more than $75 million just from store and restaurant closings, said Brian Riley, senior analyst at Tower Group, a consulting company. Tower’s research on gift cards can be viewed by clicking here.

Consumer groups are worried about how little shoppers are protected when spending all that money. 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. FTC spokesman Mitchell J. Katz said the agency had received the petition “and we are determining what our response will be.” In the meantime, the FTC has issued a consumer alert on gift cards which can be viewed by clicking here.

These concerns have many people wondering whether giving gift cards is the way to go. From the experiences with expiration dates, hidden fees, and now the threat of lost value associated with bankruptcies, it may be that gift cards are simply not worth the risk. Hopefully, a solution can be worked out between gift card sellers and the FTC so that consumers will be protected. We will keep you posted.

To read the full Boston Globe report, click here.