What happens to gift cards, warranties and orders when a store goes out of business?

Published 12:00 am Wednesday, December 24, 2014

Better Business Bureau  

The holiday shopping season is upon us and it could make or break many major retailers.  With more retailers closing stores, or going out of business completely, consumers are confused about what will happen to their outstanding product orders, unused gift cards and extended warranties.

When a retailer files for bankruptcy, there are two primary options – Chapter 11 or Chapter 7.  Chapter 11 means the company intends to reorganize and continue to do business as usual. However, Chapter 7 means the company will close and liquidate any assets in order to pay creditors.

If a business intends to continue operations under Chapter 11, it will often still redeem gift cards, fulfill services and deliver on goods. Some Chapter 11 bankruptcies, however, quickly turn into Chapter 7 and then the chances for the consumer to receive any compensation are greatly diminished.

BBB has this advice for consumers if a retailer files for Chapter 7 bankruptcy:

  • Product Orders – Bankruptcy law is specific regarding who will benefit first in the case of a retailer’s liquidation. Unfortunately, customers are at the end of the line. Typically, the money gained from selling the company’s assets goes to paying back secured creditors, as well as any employee wages.  Whatever is left over is divvied up among customers who have outstanding claims for goods and services.

Customers who paid with credit cards may be able to dispute the charge with the credit card company and get their money back. For this reason, BBB recommends that consumers pay with credit cards, instead of cash, checks or debit cards. Customers who paid by cash, check or debit card will need to file a claim with the bankruptcy court—the deadline is typically 90 days after the bankruptcy filing date.

  • Warranties – The validity of any outstanding warranties varies for each bankruptcy. If a retailer goes out of business, the consumer may be able to rely on the manufacturer’s warranty. If a manufacturer goes out of business, the consumer may be able to rely on any warranties provided by the retailer. Many extended warranties and service plans are provided and administered by third parties and are typically not affected by a retailer or manufacturer going bust.
  • Gift Cards – In cases of Chapter 11 bankruptcy, courts will decide if the business must honor gift cards or certificates. If the business has filed Chapter 7 bankruptcy, the gift card holder must file a claim. In some cases, consumers might actually get at least part of the value of the gift card back. BBB advises consumers to redeem gift cards as soon as they are received to avoid possible problems down the road with the retailer’s solvency.

For more information, please visit BBB or call at (704) 927-8617 or toll-free in N.C. and S.C. at 1-877-317-7236.