Saturday, February 26, 2011

The Effect of a Chapter 11 Bankruptcy on Gift Cards

It seems as though more companies than ever have recently attempted to reorganize their debts under chapter 11 of the Bankruptcy Code.  Whether more companies are actually filing bankruptcy may or may not be true, but certainly we are seeing it more frequently in the news.  Indeed, over the last few months, we have seen the likes of Blockbuster, MGM, Borders, and Giordano’s file bankruptcy in order to restructure their debts.  As many of us are customers of these companies, it often leaves us wondering how their filings affect us, specifically when we hold gift cards for those companies.

Contrary to popular belief, simply because a company files bankruptcy, it is not necessarily going to dissolve.  Rather, filing under chapter 11 of the Bankruptcy Code permits a company to reorganize its debts.  It is available to businesses of all sizes as well as to individuals.  While a company is in chapter 11, it generally keeps operating its business, and therefore companies that file are called not only debtors, but also debtors-in-possession.  They are in possession of their estate assets.  While the company is in chapter 11, it, along with other parties in interest, may propose a Plan of Reorganization.   If the plan is confirmed by the Court, it will be binding and prescribe the treatment and payout terms of the company’s debts.

Now that we’ve got a very general idea behind corporate reorganization under chapter 11, let’s get back to the real question – what happens when Borders files for bankruptcy and I haven’t used that Borders gift card that I received as a present yet?!?  This was an issue earlier this month upon the Borders filing. 

When a company files a chapter 11 bankruptcy case, it can suspend the acceptance of gift cards.  Those gift cards are treated as loans to the company and its holders are deemed to be unsecured creditors, who can end up being paid pennies on the dollar by a plan of reorganization or liquidation under chapter 7.  However, companies that file bankruptcy can ask for Bankruptcy Court approval to accept gift cards.  In fact, when Sharper Image filed bankruptcy in February of 2008, it suspended the acceptance of gift cards.  However, as soon as its competitors, including Brookstone, began offering discounts to consumers that “cashed in” its Sharper Image gift cards, Sharper Image requested the Bankruptcy Court to allow the company to accept the gift cards.  The Court later allowed Sharper Image to accept gift cards, but only if the gift card holder spent at least double the gift card amount.

As of the date of this article, Borders has stated that they will continue to honor its customers’ gift cards.  In fact, among the numerous motions filed by the debt-ridden book store mega chain was a motion requesting that the Court approve the ongoing acceptance of gift cards.  The Bankruptcy Court entered an order authorizing the acceptance of the gift cards that same day.  So what should you do if you have a Borders gift card?  Probably use it as soon as possible, as the order signed by the Court authorizes, but doesn’t obligate, Borders to accept the gift cards.  As a result, the company can suspend the acceptance of gift cards at any time.  So breathe a sigh of relief if you hold a Borders gift card, for now…