The lackluster holiday season and deepening recession will take a toll on retailers around the country. Experts are predicting the worst rash of store closings in 35 years. Already, Circuit City is operating under bankruptcy protection. KB Toys, Linens 'n Things and Mervyns all announced this year they're going out of business.
Besides seeing a favorite store close its doors for good, consumers may be left with worthless gift cards, warranties and service contracts. What happens if you've got an item on layaway at a bankrupt store or put down a deposit on a new appliance?
Here are some questions and answers about rights consumers have if their retailer files for reorganization or goes out of business — and what they can do to protect themselves ahead of time.
Q: Will my gift cards lose their value in a bankruptcy?
A: Legally, consumers who hold gift cards become unsecured creditors of the company, said Brian Shaw, a Chicago bankruptcy attorney and a board member of the American Bankruptcy Institute in Alexandria, Va. That means they are second to last in line to get their money back, just ahead of shareholders.
Practically, however, if the retailer stays in operation as it reorganizes, it can honor gift cards to keep customers happy as long as the company can afford it and gets court approval. But if the retailer goes out of business, it's less likely consumers will be able to recoup all their money.
Consumer groups have asked the Federal Trade Commission to require merchants to place money from gift card sales into a trust to protect consumers in case the retailer goes bankrupt. The groups also want gift cards to be honored as long as stores remain open, unless overruled by a bankruptcy court. The FTC says it's studying the matter.
In the meantime, be wary of hoarding gift cards. If you have them, use them right away. If you plan to buy gift cards, make sure the retailer isn't in trouble.
Q: What happens if I put down a deposit for furniture and the retailer goes belly up before it's delivered?
A: You could get your money back — up to $2,425. Legally speaking, you're an unsecured creditor but you have a priority claim ahead of gift card holders in bankruptcy court. It could take some time, however. Some retailers could decide to be more generous, especially if they plan to stay in business, or the company that acquires them wishes to maintain customer goodwill.
Q: What will happen to warranties and service contracts purchased at a retailer that files for bankruptcy protection?
A: Manufacturer warranties won't be affected and extended warranties could still be serviced if they are backed by a third-party company. But extended warranties — as well as service contracts — backed by the retailer will be in jeopardy, said Susan Grant, director of consumer protection at the Consumer Federation of America in Washington.
Q: Can I still return my product to a bankrupt retailer?
A: It depends on the retailer. Consumers might be able to exchange a product during a liquidation sale, while stores that plan to operate through bankruptcy could maintain their pre-bankruptcy return policy to keep customers happy. Alternatively, faulty merchandise could go back to the manufacturer, if the retailer doesn't step up.
Q: I've got a balance on a credit card from a bankrupt store. Do I need to pay the bill?
A: If you received the goods and services you purchased, pay your bill, Shaw said. Moreover, many stores offer Visa or MasterCard cards, which are issued by banks. They will report you to credit agencies and hire bill collectors if you don't pay up.
Q: How can I protect myself if there is a bankruptcy?
A: Use credit cards. Once you pay with cash, debit cards or checks, the retailer has your money — and you're now an unsecured creditor in bankruptcy court if you want to get a refund. With a credit card, you can dispute the charges through the bank that issued the card.
Q: How can I get my money back from the retailer? Should I hire an attorney?
A: It usually costs more than it's worth to hire a lawyer. If you were owed money before the store filed for bankruptcy protection, the retailer will probably list you and the amount you're owed in court filings. You should then get a notice in the mail with instructions on how to proceed. If you don't get the notice, you can file a proof of claim with the court — a document that's downloadable from the court's Web site.