Claim:   E-mail urges consumers to redeem gift cards issued by companies that have recently filed for bankruptcy.

Status:   Partly true.

Example:   [Collected via e-mail, April 2008]

The following companies just filed for Bankruptcy: Hollywood Video Levitz Sharper Image Linens n Things Circuit City If you have gift cards from the above list use them ASAP, they will not be valid for much longer. PASS THE WORD.

Origins:   The increasing market for retail store gift cards (estimated to reach $100 billion in 2008) may be a boon to both consumers and retailers, but the former group can sometimes be left holding the bag. Misplaced or forgotten cards, expired cards, and dormancy fees can leave gift recipients unable to reclaim the full value of their cards (although government regulations enacted in recent years have attempted to address some of these issues).

Of course, it can also prove rather difficult for consumers to reclaim the value of gift cards and gift certificates issued by retailers who have since gone out of business, an issue addressed by the above-quoted warning urging readers to use as soon as possible gift cards issued by several chains identified as recently having filed for bankruptcy (because such cards "will not be valid for much longer"). Although the warning isn't necessarily bad advice, the message also promotes some misconceptions.

First of all, a company's "filing for bankruptcy" doesn't always mean it is going out of business. Companies typically file for Chapter 11 bankruptcy protection in order to put forth reorganization plans that will allow them to keep their businesses alive while they pay their creditors over time. Companies who file for Chapter 11 may still go bankrupt anyway (Chapter 7), or their reorganization plans may not be approved by bankruptcy courts, or they may emerge from Chapter 11 protection too weak to remain viable for long, but none of those outcomes is inevitable — many businesses have thrived (or least regained a stable level of performance) after emerging from Chapter 11 protection.

Additionally, although federal law allows companies to stop honoring gift cards when they file for Chapter 11 bankruptcy protection, not all businesses do so. Some companies may continue to redeem store gift cards while they reorganize, while others may temporarily suspend redemption of gift cards for some period of time and resume it later. That any particular retail business has recently filed for Chapter 11 protection does not automatically mean that any gift cards or gift certificates it has previously issued will "not be valid for much longer."

Finally, not all the companies listed in the warning quoted above have filed for Chapter 11 protection yet (and may or may not eventually do so), as detailed below:

• Hollywood Video: Movie Gallery Inc., the second largest video rental company in North America (after Blockbuster) filed for Chapter 11 protection in October 2007. The Movie Gallery/Hollywood Video chain emerged from bankruptcy reorganization in May 2008 but closed 542 Hollywood Video stores and 378 Movie Gallery stores in the process. In May 2010 the chain announced that it was planning to close and liquidate all of its remaining stores.
• Levitz: The Levitz Furniture chain filed for Chapter 11 bankruptcy protection (for the third time in ten years) in November 2007 and shortly afterwards began the process of closing its stores and liquidating its remaining inventory. Customers still holding Levitz gift certificates may have little recourse beyond filing claims against the company in bankruptcy court.
• Sharper Image: The Sharper Image chain of specialty retail stores filed for Chapter 11 bankruptcy protection in February 2008 and initially suspended redemption of Sharper Image gift cards and gift certificates. However, the company soon lifted the suspension, albeit with additional restrictions in place: Customers using those forms of payment had to make purchases worth at least double the value of their cards/certificates had to redeem them for their full value. Sharper Image began liquidating all 184 of their outlets in June 2008.
• Linens 'n Things: In April 2008 news accounts began reporting that the Linens 'n Things chain of housewares and bedding stores was considering seeking Chapter 11 protection in the near future, but at the time the above-quoted message began circulating the company had so far delayed taking that step while it searched for a buyer. On 2 May 2008, however, the chain finally filed for bankruptcy protection after failing to find an alternate solution to its financial problems, and in October 2008 the chain began liquidating all 371 of it stores. Linens 'n Things gift cards purchased prior to 17 October 2008 are redeemable provided the holders can find still-open Linens 'n Things stores at which to use them. (The cards cannot be redeemed online.)
  
  Some versions of this list include mention of Bed, Bath and Beyond (BBBY), a retail chain which is the main competitor of Linens 'n Things in the housewares and bedding business, but BBBY is not known to be in immediate financial distress or contemplating filing for Chapter 11 bankruptcy protection at this time. In fact, in April 2008 rumors were floating that BBBY was considering purchasing 40 Canadian Linens 'n Things stores which the latter company was seeking to sell off to raise cash and avoid bankruptcy.
• Circuit City: The Blockbuster movie rental chain made headlines in April 2008 when it tendered an unsolicited $1.35 billion offer to buy the (money-losing) Circuit City chain of consumer electronics stores. Circuit City's largest shareholder (HBK Investments LP) called upon the chain to put itself up for sale, but company officials rebuffed the Blockbuster offer, saying they didn't believe the video rental giant could "consummate the proposed transaction in light of the difficult current financing environment." In November 2008, Circuit City filed for Chapter 11 bankruptcy protection, but the chain continues to sell and redeem gift cards.

Last updated:   5 July 2010

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  Sources:

    Brickley, Peg.   "Circuit City Files for Bankruptcy."

    The Wall Street Journal.   10 November 2008.

    de la Merced, Michael J. and Michael Barbaro.   "Linens 'n Things Is Shopping for a Buyer."

    The New York Times.   18 April 2008.

    Finney, Michael.   "Levitz Furniture Files for Bankruptcy."

    KGO-TV [San Francisco].   27 November 2007.

    Green, Emily.   "Don't Hoard Gift Cards."

    The Wall Street Journal.   20 April 2008.

    Geller, Martine.   "Linens 'n Things Weighing Bankruptcy: Source."

    Reuters.   11 April 2008.

    McCracken, Jeffrey.   "To Buy Time, Linens 'n Things Pays Vendors Before Delivery."

    The Wall Street Journal.   22 April 2008   (p. B1).

    McWilliams, Gary and Merissa Marr.   "Circuit City Gets Pressure from Big Investor for a Deal."

    The Wall Street Journal.   29 April 2008   (p. B3).

    Morris, Loveday and Mark Clothier.   "Blockbuster Bids Up to $1.35 Billion for Circuit City."

    Bloomberg.   14 April 2008.

    Orgel, Marty.   "Not Worth the Plastic They're Printed On."

    MarketWatch.   3 March 2008.

    Osterland, Andrew.   "Retailers Form Check-Out Line."

    Financial Week.   14 April 2008.

    Richman, Dan.   "Levitz Bankruptcy Erects Hurdles for Customers."

    Seattle Post-Intelligencer.   7 December 2007.

    Tugend, Alina.   "The Gift Card Comes Wrapped in Growing Risk."

    The New York Times.   22 November 2008   (p. B6).

    Associated Press.   "Hollywood Video Stores to Close."

    Los Angeles Times   11 May 2010   (p. B3).

    Business Wire.   "Levitz Furniture Going Out of Business Sale Begins Immediately at All Locations."

    Reuters   5 December 2007.

    The New York Times.   "Linens 'n Things Lands in Chapter 11."

    2 May 2008.

    Reuters.   "Movie Gallery Sees Exiting Bankruptcy in 2nd Quarter."

      9 April 2008.

    United Press International.   "Report: Retailer Bankruptcies Rising."

    14 April 2008.