Posted by Lending Club :: September 26, 2008 @ 9:10 am

In my post, The Gift That Keeps on Taking, I described many of the negatives of gift cards. Recent calls for reform highlight another risk of using gift cards: they only hold value if they continue to be accepted.

The typical case where gift cards may no longer be accepted is when the company issuing the card files for bankruptcy. This situation has occurred in many recent high-profile filings. Brian Riley, senior analyst at The Tower Group, estimated in March that shoppers could lose more than $75 million just from stores and restaurant closings in 2008. Bankruptcies may make cards worthless because sales of cards are not required to be kept separate from other revenue. As a result, a store can issue a gift card, spend the proceeds, and then go bankrupt. In that case, there wouldn’t be any money to refund to the customer.

The simple solution would be to require stores to hold the money from gift card sales in a separate trust account, which could only be drawn from when gift cards were redeemed. That’s precisely the solution being presented by Consumer Union in a petition to the Federal Trade Commission. Their submission was recently covered in this article. Gift card holders do have a claim to the value of their cards in bankruptcy proceedings but are such a low priority that they would rarely see a payout, even for a fraction of what they are owed.

When you add the possibility of cards becoming worthless to the service fees, expiration dates, and other limitations of some gift cards, they become even less appealing. It may be the thought that counts, but we all expect the gifts cards we give to have at least the value that we paid for them. Until the rules surrounding gift cards become more consumer-friendly, it is probably in your best interest to avoid them altogether.