Get Your Fair Share When a Company Goes Broke

What happens if I buy a gift card or make a down payment with a company that files for bankruptcy? Do I lose my money?

You might. The rules vary depending on the type of transaction and the bankruptcy court's decisions. No matter what happens, you need to be careful when shopping this season.

Gift cards. Retailers can ask the bankruptcy court to continue honoring gift cards even after they file for bankruptcy. Circuit City and Linens 'n Things, for example, were given permission to continue accepting the cards. Circuit City is reorganizing and still doing business. Linens 'n Things, on the other hand, will be closing all its stores. "The gift cards are valid as long as the stores are open," says Linens 'n Things spokesman Rich Tauberman. "Then they have no value after the stores are closed."

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If the company doesn't ask the bankruptcy court to continue to honor the cards, or if the request is denied, then the cards generally become useless as soon as the company files for bankruptcy protection. For example, Sharper Image stopped accepting gift cards when it filed for bankruptcy in February. But after competitor Brookstone started offering a 25% discount to holders of Sharper Image gift cards, Sharper Image petitioned the bankruptcy court to let it accept the cards. The company honored the cards again, but only when the users spent twice the gift card's value in one transaction. And that deal ended when the last of the Sharper Image stores closed.

Bottom line: If you have a gift card with a retailer experiencing financial troubles, use it quickly. If the company stops accepting its cards, you can file a claim with the bankruptcy court as an unsecured creditor, but you will have to wait until the banks and other secured creditors get paid before you receive anything - if there's any money left. This is a good year to give cash and merchandise rather than gift cards. See Kiplinger's Holiday Buying Guide for ideas.

Service plans and warranties. A service or warranty program, such as Circuit City's Advantage Protection Plan, may be run by a separate company and unaffected by the bankruptcy. "When you buy a service plan, you want to know whose services you are buying," says Gail Hillebrand, senior attorney at Consumers Union. "We recommend against purchasing service plans. Put aside the money for repairs instead. If you pool the amounts you'd spend on service plans, you can pay for repairs yourself."

Down payments. If you've put a down payment on an item and the company goes bankrupt, you may have a tough time getting your money back.

For down payments made with a credit card, you can put the amount in dispute if it shows up on your bill before you receive the merchandise, says Eric Friedman, director of the Montgomery County Consumer Protection Office in Maryland. Look on the back of your billing statement for the billing-dispute procedure. "Hopefully, the merchandise will show up and you can take it out of dispute," he says. If the item doesn't arrive, then you should be able get the charge removed through the card issuer.

You have fewer remedies, though, for down payments you make with cash or a check, says Friedman. Contact your state or local consumer-protection agency for help trying to retrieve your money or your item. You can find contact information for your agency at the Consumer Action Web site. Also see ConsumerAction.gov for more information.

If you can't get your item or your money, you can file a claim with the bankruptcy court. "I would stress the importance of a consumer filing a document called a 'proof of claim' in the merchant's bankruptcy case," says Geoff Walsh, a staff attorney with the National Consumer Law Center in Boston. "At a minimum, the consumer will be in the loop for notices about the proceeding." The deadline for filing this paperwork is usually 60 days after the first date set for creditors to meet for Chapter 7 bankruptcy, or a date determined by the court for Chapter 11. "If not filed on time, they lose all rights," Walsh says.