BBB Advice on Customer Steps to Take if a Retailer Goes Bankrupt
November 21, 2008

 

As a result of the declining economy, the number of retailers closing their doors has increased substantially, leaving confused shoppers wondering what will happen to goods they haven’t received, gift cards and outstanding warranties. Your Better Business Bureau if offering general advice for consumers on what to do if a retailer closes up shop without fulfilling its promises.

The current freeze on credit is having a serious impact on businesses. Bankruptcy filings by U.S. businesses rose 67 percent in September over the previous year, according to data compiled by Automated Access to Court Electronic Records. Some of the bigger names filing for bankruptcy in 2008 include A Sharper Image, Linens n’ Things, Lillian Vernon, Levitz Furniture and most recently Mervyn’s department store chain.

“Business bankruptcy filings increased 41.6 percent in the first half of this year compared to 2007, and the U.S. economy saw nearly 34,000 businesses go under,” said Randall Hoth, Wisconsin BBB president/CEO. “In the wake of so many bankruptcies, and with many businesses pinning their hopes on the holiday season, customers have been and will most likely continue to be in the dark, wondering if they’ll ever get the goods they paid for or if the gift cards they are holding are even worth anything.”

When a retailer files for bankruptcy, it will commonly file Chapter 11, which means the company intends to reorganize and continue to do business, or Chapter 7, which means the company will close up for good and liquidate any assets in order to pay creditors. If a business intends to continue operations under Chapter 11, it will often still redeem gift cards, fulfill services and deliver on goods. Some Chapter 11 bankruptcies, however, quickly turn into Chapter 7 and then the chances for the consumer to receive any compensation are greatly diminished.

Following is advice from BBB on steps consumers can take if a retailer files for Chapter 7 bankruptcy:

Goods or Services Due
Bankruptcy law is specific regarding who will benefit first in the case of a retailer’s liquidation. Unfortunately, customers are at the back of the line. Typically, the money gained from the selling of the company’s assets goes to paying back secured creditors, as well as any employee wages, before whatever is left over is divvied among customers who didn’t receive the promised services or goods.

Customers who paid with credit cards, though, may be able to dispute the charge with the credit card company and get their money back—for this reason, among others, BBB highly recommends consumers pay with a credit card. For the rest who paid by debit card, check or cash, they will need to file a claim with the bankruptcy court administering the process—the deadline is typically 90 days after the filing date. More information on filing a claim, including downloadable forms, is available online at www.uscourts.gov.

Warranties
The validity of any outstanding warranties varies for each bankruptcy. If a retailer goes out of business, the consumer may be able to rely on the manufacturer’s warranty. If a manufacturer goes out of business, the consumer may be able to rely on any warranties provided by the retailer. Many extended warranties and service plans are provided and administered by third parties and are typically not affected by a retailer or manufacturer going bust.

Gift Cards
In cases of Chapter 11 bankruptcy, courts will decide if the business must honor gift cards or certificates. If the business has filed Chapter 7 bankruptcy, the holder must file a claim. In some cases, consumers might actually get at least part of the value of the card back. Some retailers have tried wooing new customers by accepting a bankrupt competitor’s gift card – but this is generally a rare circumstance. BBB advises that consumers redeem gift cards as soon as possible in order to avoid any headaches with bankruptcy files and court actions.

For more trustworthy advice on extended warranties, gift cards, and on how to become a savvier consumer this holiday season, go to www.bbb.org.