Consumers Union petitions over gift cards

updated 2:56 p.m. ET Sept. 11, 2008

NEW YORK - Consumers Union, the nonprofit publisher of Consumer Reports, filed a petition Thursday with the Federal Trade Commission asking the agency to protect shoppers from losing money on gift cards when retailers file for bankruptcy.

In its petition, Consumers Union, joined by the Consumers Federation of America, National Consumer Law Center and U.S. PIRG, urged the agency to require merchants to segregate funds generated from gift card sales in a trust account and to honor the gift card as long as the store remain open unless a bankruptcy court orders otherwise.

Consumers Union called on the FTC to declare the sale of gift cards without segregating funds and holding the money in trust to be "an unfair and deceptive practice."

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

The move comes as a harsh economic environment has resulted in a growing number of retailers filing Chapter 11 bankruptcy reorganization, calling into question the fate of the mounds of unused plastic gift cards. That's because bankruptcy courts treat gift cards as a loan to the company, not as cash. Consumers Union says it's up to the merchant to petition the court to allow it to continue to accept its gift cards. But shoppers may lose the value of their gift card if the merchant doesn't make such a request or if the court denies it. In these cases, the only remaining option for shoppers is filing a claim as an unsecured creditor to a bankruptcy proceeding.

The issue was spotlighted earlier this year when The Sharper Image announced that it was suspending temporarily its acceptance of gift cards, following its Chapter 11 bankruptcy filing. Later, it petitioned the court to allow it to accept its own gift cards if consumers spent twice the value of the gift card on a single transaction.

Sharper Image, which is now being liquidated, is selling its remaining assets to an investment group for $49 million.

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