Gift cards may prove to be lumps of coal this season

By James Heffernan -- Daily Staff Writer

Everyone loves a gift card, right?

They're always the right color, and they're never too large or too small.

But this season, with the economy steeped in recession, the same shoestring budgets that are limiting shoppers to bargain hunting are taking a toll on prepaid plastic.

Holiday gift card sales are expected to top out at $24.9 billion this year, down 6 percent compared to 2007, according to the National Retail Federation.

At the same time, demand for the cards is up, the group says, surpassing that of books, electronics, clothing and accessories.

"Most consumers have been holding back on spending for themselves all year long and would love nothing more than receiving a gift card that would let them buy whatever they want," says Phil Rist, vice president of strategy for BIGresearch, which conducted the survey for the retailers group. "Being able to walk though a store and select their own present would be a gift in and of itself for many Americans."

So why aren't shoppers obliging? Those surveyed gave all the familiar reasons -- too impersonal, too many hidden fees, not sure which card the recipient would want -- and then there was this one, a relative newcomer to the list: Fear that the retailer will go out of business.

It's a legitimate concern given the current retail climate.

Gift card holders have few rights when, for example, a retailer files for bankruptcy protection. Such holders are considered unsecured creditors, according to Consumers Union, the nonprofit publisher of Consumer Reports. It's up to the retailer to petition the bankruptcy court to allow it to continue to accept its gift cards. If the company doesn't, or if the court denies it, gift card holders have to get in line with everyone else who have claims against the retailer.

"Gift cards shouldn't be the gift that stops giving when retailers go bankrupt," says Michelle Jun, senior attorney for Consumers Union. "Unfortunately, there is no guarantee that consumers will be able to redeem the full value of their gift cards from struggling or bankrupt retailers."

Circuit City, which announced in November that it would seek Chapter 11 bankruptcy protection, said it will continue to honor outstanding gift cards, and will continue to sell them. But the Richmond-based electronics chain also will be closing 155 stores, which means some card holders will have a harder time finding a place to redeem them. And if the company's efforts to reorganize fail, the cards could become worthless.

The Circuit City in Winchester is not one of the stores slated for closure.

After Linens N Things filed for bankruptcy in May, it won court approval to continue to operate its gift card program. However, filings in the bankruptcy case made clear that the company did not maintain a cash reserve to fund outstanding gift cards.

Linens N Things has since begun liquidating merchandise at all 370 of its stores nationwide, including the one at Winchester Station, after the home retail chain failed to find a buyer at auction.

In September, Consumers Union and other consumer advocacy groups filed a petition with the Federal Trade Commission urging the agency to require retailers to segregate funds generated from gift card sales in a trust account and to honor a consumer's gift card as long as the doors remain open, unless a bankruptcy court orders otherwise.

So far the FTC hasn't responded to the petition.

* Contact James Heffernan at jheffernan@nvdaily.com