RadioShack shoppers with unused gift cards will face the same fate as customers of other recently bankrupt chains that closed down before some consumers could redeem the vouchers.
Just ask La'Keya Keo, a Body Central Corp. customer in York, Pennsylvania, who was holding a $50 card when the apparel chain shuttered in January. By the time she took it in, the store was gone and headquarters wasn’t answering the phone.
“I didn’t find out until we went there that the store was closed,” said Keo, 33, a nurse. “They were still sending out the e-mails about discounts.”
In the pecking order of who gets paid when a retailer goes belly up, customers are considered unsecured creditors. That means if they don’t use their cards while stores are still open, consumers have less protection in a bankruptcy than, say, a bank lender.
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Cardholders’ claims for payment can’t be satisfied until after those of secured creditors are fulfilled. In the meantime, the stores may have liquidated their inventory and left customers with nowhere to spend their card balance.
While retailers often file for Chapter 11 with the intention of re-emerging later, the move is increasingly the first step toward liquidation. That’s because companies frequently wait to file until they’re loaded up with debt. In that state, retailers have less chance of reorganizing and fewer assets left to pay the people they owe money — including gift-card holders.
Lawrence Gottlieb, a partner at Cooley LLP in New York, said his law firm is seeing fewer retailers bounce back from bankruptcy.
“Our typical Chapter 11 these days, unfortunately, is a liquidation of all or most of the stores,” he said.
Since the end of last year, retailers representing thousands of stores have declared bankruptcy and begun winding down their businesses. RadioShack, the almost-century-old electronics chain, joined the list when it filed on Feb. 5. The company got court approval to honor gift cards for 30 days after that date, meaning customers have to act by the end of the week if they want to use the cards. Deb Shops, a women’s clothing retailer that’s also going out of business, is accepting its gift cards until March 8.
The mass closings have followed a boom in the use of gift cards. Sales of retailer-branded cards have jumped 37 percent in the past five years, climbing to $41 billion in 2014 from $30 billion in 2009, according to Brian Riley, senior research director at Arlington, Virginia-based CEB. He predicts that the market will reach $48 billion in 2017. For shoppers, they’re viewed as being good as cash.
But when there’s a bankruptcy, things get complicated.
After a company files, it can ask a judge to approve the honoring of gift cards during going-out-of-business sales. Judges typically agree because they don’t want to anger customers or state attorneys general, who have been known to press the issue, Gottlieb said. He said he’s not aware of any judges rejecting a request to redeem gift cards.
Competitors sometimes step in to honor gift cards of defunct retailers to try to win new customers, said Greg Segall, chairman and chief executive officer of Versa Capital Management in Philadelphia. There’s no guarantee of that, though.
With more retailers waiting until their assets have dwindled before they file for bankruptcy, there’s less money to go around in general, Klein said.
“There’s nothing left in the estate to pay any creditor who has a claim out there, and that includes people who hold unredeemed gift cards,” he said. “It’s a real problem in retail bankruptcies.”
Lauren Coleman-Lochner writes for Bloomberg News