When you're looking to quickly scratch a few names off your Christmas list, those gift-card trees at the grocery store sure are tempting.
But with retailers struggling this holiday season, and big names like Circuit City closing stores and filing for bankruptcy protection, some consumer advocates warn that store gift cards are the gifts that may stop giving.If you buy a gift card from a retailer that goes bankrupt, it's uncertain when, or if, it can be redeemed, experts say.
In the case of Circuit City, the company sought and received permission in bankruptcy court to honor its outstanding gift cards, a spokesman said. But such petitions are optional. If the retailer doesn't ask or the judge rejects the request, gift-card holders have to file a claim in bankruptcy court and get in line behind all the other people the company owes.
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That's likely way more hassle than the card is worth.
"You might be throwing your money away, or at least locking it away for a while," said Michelle Jun, an attorney with Consumers Union, the non-profit publisher of Consumer Reports magazine.
Consumers Union is leading a group of advocates in lobbying the Federal Trade Commission for consumer protections for gift cards. The group is asking that the government require merchants to put gift card funds in a trust, so consumers are guaranteed their money.
In a letter to the FTC, Consumers Union highlighted the bankruptcy of Sharper Image in February as an example of what happens when gift cards go wrong. According to the letter, consumers were left "empty-handed" when Sharper Image stopped honoring the cards, an estimated $20 million in value. The company later petitioned the court to allow it to accept the gift cards, but now that Sharper Image is out of business, consumers must file a claim in court.
Richard Kaye, a spokesman for Hilco Merchant Resources, the company that ran Sharper Image's going-out-of-business sale, said he was not aware of consumers having difficulty redeeming gift cards.
"In general, because these are bankruptcies, the rule of thumb is that gift cards are honored" if purchased before the start of the going-out-of-business sale, Kaye said (this sentence as published has been corrected in this text).
Year to date, consumers have lost roughly $85 million in gift-card value to bankruptcies, said Brian Riley, a research director at TowerGroup, a financial advisory firm.
"When the economy is cooking, [gift cards] are great. I buy them myself," Riley said. "But when the economy goes south, like it's doing now, you're lending money to people who might have trouble repaying it."
But Ellen Davis, vice president of the National Retail Federation, said consumers should not be scared off of gift cards. Davis said most retailers that fail honor their gift cards.
"Yes, times are tough. But most retailers who are around now will be in business this time next year," Davis said.
Gift cards may not be popular with consumer advocates, but we shoppers love them. According to a retail federation survey, gift cards will be the most requested gift this holiday season, with 55 percent of people planning to ask for them.
And according to figures released by the federation, holiday shoppers plan to purchase about four gift cards, spending an average of $147. That's roughly $24.7 billion in gift cards.
Ed Mierzwinski, consumer program director with the Illinois Public Interest Research Group, said if you must buy gift cards, opt for store cards rather than bank cards, the ones with Visa and MasterCard logos "because store cards are less likely to have fees that cause the card to shrink in value."
But that's assuming that the store doesn't go bankrupt, right?
"Right. That's why I said rule No. 1 is don't buy gift cards. Rule No. 2 is, if you must buy gift cards, buy store cards, but see rule No. 1," he said.