Bankruptcy and Gift Cards – 4 Reasons Why Retailers Should Honor Gift Cards During Bankruptcy Reorganization

What happens to gift cards when a company files for bankruptcy? The recent bankruptcies of Linens 'n Things, The Sharper Image, and Bombay Company have brought the issue of gift card redemption during bankruptcy to the forefront. With the economic situation expected to worsen in 2008, more retailers are likely to file for bankruptcy, and as expected, consumers with gift cards will be affected.

When you buy a gift card, you become an unsecured creditor to the gift card issuer until you redeem the full value of your gift card (unless it expires or is eaten-up by fees). If the gift card issuer files for Chapter 11 bankruptcy protection, federal law allows the company to stop honoring gift cards. However, the company may petition the bankruptcy court to allow the continued redemption of gift cards.

A company planning to continue in business should make every effort to honor gift cards while under bankruptcy protection. Refusing to accept gift cards is a bad move and could ultimately work against the company since it will only infuriate the very customers it really needs during bankruptcy reorganization. Below are four (4) reasons why continuing the redemption of gift cards under bankruptcy reorganization is a smart move for a retailer:

Maintain Customer Loyalty: If the company plans to stay in business, refusing to accept gift cards will only anger customers, who will feel cheated. This will not only turn away current customers but also drive potential customers to the competition. This is because some aggrieved customers will share their horrible experiences with family members, friends, and coworkers who will likely stay away from the company since they would not like to go through a similar experience. In today’s world where emails spread like viruses, the last thing a company needs is for an email to be circulating about the horrible experience gift card holders went through with the company.

Minimize Competitor Actions: When a company suspends the redemption of gift cards during bankruptcy, it opens the door for the competition to steal its customers. A good example was seen during the recent bankruptcy of The Sharper Image. At the onset of the bankruptcy, the company announced the suspension of gift card redemption. As expected, affected customers reacted negatively to the decision. Brookstone and ThePurePro.com, both competitors to the Sharper Image saw an opportunity to gain more customers so they announced special discounts targeted at The Sharper Image gift card holders. It appears The Sharper Image began to feel the impact of these actions and it later reversed its decision and began accepting gift cards from customers.

Project Business as Usual Image: When a company files for Chapter 11 bankruptcy, it typically proposes a plan of reorganization to keep its business alive. This plan may include selling, closing, or consolidating some store locations. For the stores locations that remain open, it is important to project an image of business as usual.

Refusing to accept gift cards would be the wrong signal to send since it reminds customers that the company is in serious trouble. Customers may begin to wonder if service will begin to deteriorate, especially support for big ticket items. Continuing the redemption of gift cards is a good way to assure customers that their shopping experience with the company will not be impacted negatively by the bankruptcy.

Increase Sales: Research has shown that gift card holders typically spend about 20% more than the value of the gift card. By accepting gift cards during bankruptcy, the company has the potential to increase sales since people redeeming gift cards would likely spend more than their gift card value, thereby helping the company boast sales and hopefully become more profitable.