Use It or Lose It: Gift cards and Bankruptcy


We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Wednesday, July 8th, 2015











When Radio Shack shuttered its last store $43 million in gift card funds were unused. That’s a lot of cheddar. Anyone who had a Radio Shack gift card and is looking for a piece will have to file a claim in bankruptcy court.** Unfortunately, this kind of thing happens a lot. Retailers fail and folks are left with what appears to be worthless plastic. We don’t want this to be you, so we’re sharing some important stuff about store gift cards and bankruptcy:

Companies in bankruptcy do not have to honor gift cards

Yes, really, your gift card may be worthless once a business goes bankrupt. While there are different types of bankruptcy filings (Chapter 7 and Chapter 11), and therefore different outcomes (usually bad and almost as bad), the bottom line when you have a gift card from a retailer that’s filed for bankruptcy: you may be out of luck.

Not gonna happen

You’re likely not going to be able to use your gift card if the store it’s for files for Chapter 7 (liquidation). As retailers in Chapter 7 have usually closed their doors, you can’t redeem an unused gift card for merchandise or services. So what to do? As discussed in a little bit more detail below, you can file a claim with the bankruptcy court and try to get some lost value back.

Whatever the Judge says

If a retailer files for Chapter 11 (reorganization), you may or may not be able to redeem your card even if its stores are still open. That’s because companies that have filed Chapter 11 cannot, absent approval of the bankruptcy court, honor outstanding gift cards.

Many stores undergoing reorganization will ask the courts to allow them to accept gift cards in order to maintain consumer goodwill, and judges often allow it. But watch out: there are often very short times during which you can redeem a gift card. For example, Radio Shack gift cardholders had only about six weeks or so to redeem their cards after the company filed for Chapter 11 in early February. Also watch out for conditions on gift card redemption. When Sharper Image filed Chapter 11, consumers were only allowed to redeem their gift cards if they spent twice the value of the card.

As limited as options may be for redeeming a gift card at a retailer in Chapter 11, it’s probably better than filing a claim and waiting. And waiting. And waiting.

If you file a claim against a bankrupt retailer

As noted above, if you don’t use a gift card before the retailer that issued it goes belly-up, you’ll likely have to file a claim to have any hope of getting your money back. Procedures for filing claims vary, and retailers may not be very good about letting you know how to do so,** but before you pitch what you think may be a worthless gift card, spend a few minutes on the Internet searching the retailer’s website, or Googling how to file a claim for your gift card’s value, or – as a last resort – try your state’s attorney’s general website, as they may have information about what to do with a gift card from a defunct retailer. Once you have this information, be realistic about your chances of getting your money back. Here’s what you need to know about claims:

  • Don’t expect instant pay-back

It can take a long time to resolve gift card claims. Four years after Borders went under, lawyers are still fighting about the $210 million worth of unredeemed Borders gift cards.

  • Don’t expect to get paid in full

As the holder of a gift card, you are an unsecured creditor of the failed business. While federal bankruptcy law gives gift card holders some level of priority over other claimants to a bankrupt retailer’s assets, the amount of a priority claim is limited:  $2,775 (see 11 U.S.C. § 507(a)(7)). You may end up with only a percentage of what’s due to you, if anything.  And that’s after you have gone to the time and trouble of filing a claim.

Bottom line: if you get a gift card use it ASAP

So how to avoid the hassles of redeeming a gift card when a retailer is in bankruptcy? Try to avoid it.

If you get a gift card, use it right away. This applies to all gift cards, even those from banks and solid retailers. Gift cards have few legal protections and lots of pitfalls. (For more on gift cards, see here.)

And for gift-givers?

Our advice: give cash.


** The Texas Attorney General is suing over how Radio Shack handled (or failed to handle) notifying consumers about how to get their money back in the wake of the Chapter 11 filing by the retailer. As of this writing, that case was unresolved. You can read more about it here.

2 responses to “Use It or Lose It: Gift cards and Bankruptcy”

  1. Grace says:

    Very well presented! This article is easier to understand than others. Thanks for a valuable share!

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