VIEWPOINT   THE CONSUMERS UNION PERSPECTIVE

Here, a monthly perspective from Consumers Union on the latest challenges—and possible solutions—facing U.S. consumers today. See archived letters.

When a gift card is no gift

Last holiday season, John Houston received a turntable as a gift. He didn’t need it and returned it to Sharper Image, receipt in hand, but the store would only give him a refund in the form of a store credit.

Soon after that, Houston, a hospital administrator from Belmont, Calif., learned that Sharper Image had filed for bankruptcy. He quickly tried to use the credit, but the store refused it and told him he’d have to file a claim in bankruptcy court. “The retailer didn’t really care, and I’m out $200,” he says. He submitted the paperwork and is waiting for the court’s decision.

Consumers Union has long warned of the hidden fees and expiration dates of many gift cards. Now there’s another twist: If a retailer goes bankrupt, its gift cards and merchandise credits might be worth little or nothing. That could add up to a big hit; Sharper Image customers might lose some $40 million in gift cards and credits, according to court records.

In bankruptcy court, such unused funds are treated as debt. A retailer can ask the court for permission to continue to accept them. If the court says no, the cards are worth little more than the plastic they’re printed on. Consumers may be left with only one option: to file a claim as an unsecured creditor in the bankruptcy proceedings, a cumbersome process.

What Consumers Union is doing

Advocacy groups including Consumers Union have petitioned the Federal Trade Commission to require that retailers set aside and hold in trust sufficient funds to back up gift cards should the retailer file for bankruptcy. We have also requested that the FTC create and maintain a registry of bankrupt retailers to inform the public of the steps the retailer and the court have taken. We believe that consumers should not have to jump through hoops to reclaim money owed to them.

In addition, Consumers Union has drafted model gift-card legislation that we believe should be in place in all states. It would, among other things, ban expiration dates and eliminate dormancy fees.