When a retail business closes or files for bankruptcy, what becomes of the unused gift cards and gift certificates that it has issued to consumers? The question has unfortunately become common for both businesses and consumers. A similar question can apply to consumers filing for personal bankruptcy. The redeemable value of gift cards sitting unused in people’s homes may number in the billions of dollars, with the average U.S. household holding on to an estimated $300 worth of gift cards. Are gift cards and similar assets, like credit card rewards, considered “assets” for the purpose of bankruptcy? The answer depends primarily on whether the asset has any intrinsic cash value or not.
Consumers always run a risk with gift cards and gift certificates, since their value largely rests on the ability of the store, known as the issuer, to honor their value. A gift card might lose its value in an instant because the issuer files for bankruptcy or goes out of business. After filing for bankruptcy in 2008, The Sharper Image announced that it would stop redeeming gift cards, gift certificates, and even certificates for store credit. A New York bankruptcy court ruled in 2012 that consumers could no longer redeem gift cards at the bookstore chain Borders, which had filed for bankruptcy and begun liquidating its stores the previous year.
Problems with gift cards might occur simply because a business changes ownership. Blockbuster Video, which recently closed its last stores, became the subject of controversy when it stopped accepting gift cards in 2011. This occurred shortly after DISH Network bought the video rental chain. It began selling gift cards again later that year, and also changed its policy to allow customers to trade in old gift cards for a set number of movie rentals.
The laws regarding how issuers must treat gift cards in bankruptcy varies from one state to the next, with some states viewing them as unsecured debts with a very low priority and others, including California, viewing them as something the business holds in trust for the consumer. California requires issuers that have filed for bankruptcy to continue to honor gift certificates issued before the filing date, describing the gift certificate’s value as “trust property of the beneficiary.” CA Civ. Code § 1749.6(b).
Whether a gift card is an “asset” in proceedings like bankruptcy may depend on whether or not it has a cash value. California law also requires issuers to redeem gift cards, with some exceptions, for their cash value or provide a replacement of equal value. CA Civ. Code § 1749.5. Some states do not have this requirement, and some gift cards include language stating that the card has no cash value and is only redeemable for goods or services from the issuer. The same may be true of credit card reward points, frequent flyer miles, and other programs that consumers may redeem. Some issuers allow consumers to “recharge” their gift cards’ value. These types of gift cards may be comparable to prepaid debit cards, which generally are considered assets in bankruptcy.
The bankruptcy system offers relief to people in financial distress, providing them with a way to sell assets to make payments, restructure and pay down their bills, and possibly discharge their remaining debts at the close of the case. Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles area in their personal bankruptcy cases since 1997, helping them rebuild their financial lives with respect and dignity. To schedule a free and confidential consultation regarding your case, contact us today online or at (310) 475-9399.
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Credit Counseling and Debtor Education Requirements in Personal Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, December 20, 2013
How Are Payday Loans and Cash Advances Treated in Bankruptcy? Los Angeles Bankruptcy Lawyer Blawg, October 16, 2013