After bankruptcies, gift cards can be worthless

Gift card holders fall in the class of unsecured creditors, which is "low in the pecking order," Kleinberg said. Those at the top of the list are secured creditors — with debts backed by assets such as real estate or accounts receivable.

Of course, if a company is purchased through a Chapter 11 bankruptcy process, the new buyer could honor gift cards.

That appears to be the case with Fortunoff, the jewelry and home furnishings chain that agreed last month to sell to an affiliate of NRDC Equity Partners LLC, which owns Lord & Taylor department stores and plans to expand the Fortunoff chain. A Fortunoff spokeswoman said the company is honoring gift cards.

Riley, of The Tower Group, estimated that the retailer did about $32 million in business last year from gift cards.

Sharper Image's rival, Merrimack, N.H.-based Brookstone Inc., is capitalizing on the situation. It announced last week that it would exchange Sharper Image gift cards for 25 percent off any purchase.

"We thought it would be a great way of acquiring new customers," said Brookstone spokesman Robert Padgett. "We are here for the long haul, and thought it would be good to let them know."

Ricki Gard, a manager of the Saks Fifth Avenue's Premier salon in New York, said it has been able to attract new clients from high-end spa Georgette Klinger, which abruptly closed its locations around the country a week before Christmas, leaving gift card holders in a lurch.

The Saks salon, leased to an outside company, has been offering 30 percent discounts on first-time services for Georgette Klinger gift card holders, though that was little comfort to many who had thousands of dollars stored on their prepaid cards.

Carol Ann Razza, a Long Beach, N.Y., resident and Georgette Klinger customer for 18 years, lost several hundred dollars when the salon closed its doors.

"You really feel like you were robbed," said Razza, who had a prepaid credit stored on the spa's computer.

Experts say shoppers should never assume that if a retailer files for bankruptcy but remains in business, that their gift cards will be redeemable. Sharper Image, for example, plans to close 90 of its 184 stores soon after selling their inventory.

On the other hand, aggressive store closings can give some consumers the impression that the company is gone for good, and their gift cards are worthless.

Lonnie Miller thought her $50 gift card from KB Toys Inc. wasn't valid. The Wayne, N.J., resident thought the toy retailer went out of business after watching a few stores in her area shut down. Upon learning that KB toys is in still business, she said she will use her card online.

As for her $25 Fortunoff card — a gift from her aunt — she went out Friday to spend it immediately.

"With the uncertainty today, I didn't want my aunt's gift to be only a card," Miller said.

MORE FROM CONSUMER NEWS

Consumer News Section Front

Pinching pennies like your grandparents Bush signs bill banning lead from toys ConsumerMan: A victory for consumers Mechanics see ethanol damaging small engines Congress sends Bush bill banning lead in toys Calif. judge rules against Sprint over fees Companies offer less for your dollar Jammed transit systems running on fumes High food costs hit school lunch trays Shopping to help save the world Consumer News Section Front   Add Consumer News headlines to your news reader: