What to do with gift cards as retailers like Toys R Us go bankrupt

Don’t count on gift cards to retain their value after a business goes under.

Toys R Us continued to honor gift cards after it filed for Chapter 11 bankruptcy in September, but when the company announced on Thursday that it will close or sell all of its U.S. stores, a spokesperson told USA Today that the company would only accept the cards for the next 30 days. That means that, as of about April 14, gift cards to the store will be worthless, so customers need to act fast.

The toy distributor is the latest business to announce that it is liquidating its U.S. operations. In 2017, over 20 retailers filed for bankruptcy. J.C. Penney, RadioShack and Macy’s all announced that they would be closing 100 stores. Sears did the same this past January, and 16,000 former employees are now expecting a reduction in their pensions.

The so-called “retail apocalypse” is largely the result of e-commerce, experts think, though developers also may have built an unsustainable number of malls in the second half of the 20th century. Plus, there are indications that Americans are less materialistic than they once were. Consumers are buying less clothing now compared to the ’90s, for example.

Still, as the trend continues, bankrupt companies are likely to stop honoring gift cards.

“Gift cards are, technically, unsecured debt of the bankrupt retailer and bankruptcy law gives them no special protection,” said Melissa Jacoby, a law professor at the University of North Carolina at Chapel Hill.

Customers with gift cards are considered unsecured creditors, Brian Davidoff, a financial restructuring attorney for Greenberg Glusker, told CNN. When a company declares bankruptcy, judges ensure they prioritize paying off secured creditors first, like bank lenders and vendors.

In fact, once a company declares bankruptcy, it has to ask a bankruptcy court for permission to continue to honor gift cards. Most do, at least for some time.

When Borders went bankrupt in 2015, gift card holders made the claim that the bookstore had not adequately warned them that the cards would soon be worthless. But lower courts decided that they had waited too long to make their claims against Borders, and the U.S. Supreme Court opted against taking up the case. Andrew Behlmann, an attorney representing the chain, made the claim that shoppers had sufficient time to redeem their cards during the store’s liquidation sales.

The bottom line: If a retailer is going out of business, use your gift card while you still can.

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