What Happens to Gift Cards When a Business Closes?

Gift cards are a popular and convenient way to give gifts. A common question arises regarding their fate when the issuing business ceases operations, leaving consumers uncertain about their value. Understanding the financial intricacies of gift cards and various business closure scenarios is important. This article clarifies what happens to gift cards when a business closes, outlining financial implications and potential actions for cardholders.

The Financial Nature of Gift Cards

When a business sells a gift card, it records the funds as a liability on its balance sheet, typically as “unearned revenue.” This reflects the business’s obligation to provide future goods or services. Revenue is only recognized when the cardholder redeems the gift card, at which point the liability is reduced.

State laws primarily govern gift card regulations, leading to variations in rules regarding expiration dates, dormancy fees, and escheatment. The Credit CARD Act of 2009 requires gift cards to remain valid for at least five years from issuance. However, states can impose stricter consumer protections, with many prohibiting expiration dates or dormancy fees, or specifying conditions for their application.

Breakage occurs when gift cards are sold but never fully redeemed. Businesses estimate breakage and recognize this unredeemed value as revenue over time. However, state escheatment laws may require unredeemed gift card balances to be turned over to the state as unclaimed property after a period of inactivity. These laws treat unclaimed funds like abandoned property, with dormancy periods typically ranging from three to five years, varying by state.

Impact of Business Closure on Gift Cards

The fate of a gift card when a business closes depends on the type of closure, which influences available legal and financial avenues. Scenarios include formal bankruptcy, voluntary shutdowns, or acquisitions. Each type carries distinct implications for gift card redeemability.

Chapter 7 Bankruptcy

In a Chapter 7 bankruptcy, the business undergoes liquidation, selling assets to pay creditors. Gift card holders are unsecured creditors, placing them low in repayment priority. After secured and priority unsecured creditors are paid, little is often left for gift card holders. While cardholders can file a “proof of claim” with the bankruptcy court, recovery is typically minimal and can take considerable time.

Chapter 11 Bankruptcy

A Chapter 11 bankruptcy involves reorganizing the business’s debts while it continues to operate. The business may propose a reorganization plan addressing gift card liabilities. This could involve honoring cards, offering partial redemption, or converting value to new terms, depending on the plan and court approval. The outcome for gift card holders is uncertain but offers a possibility of some value recovery or continued use.

Voluntary Closure

When a business closes voluntarily without filing for formal bankruptcy, the situation for gift card holders can be challenging. Without a legal framework like bankruptcy court, there is typically no formal process for consumers to claim funds. Gift cards may become worthless unless the business proactively announces a plan to honor them during a closing sale or a limited post-closure period. Consumers are then reliant on the business’s goodwill or any remaining assets it chooses to allocate.

Acquisition or Merger

If a business is acquired by or merges with another entity, gift card redeemability depends on the acquisition agreement terms. The acquiring company may honor existing gift cards for goodwill or customer loyalty, but is not always legally obligated. Consumers should review public announcements or contact the new entity for their policy on previously issued gift cards. The acquiring company might integrate old cards or set a specific redemption period.

Actions for Gift Card Holders

When a business that issued a gift card closes, prompt action can improve recovery chances. First, verify the official closure status. This can be done by checking state corporate registries, news announcements, the business’s website, or social media. Understanding the closure’s nature, whether bankruptcy or voluntary shutdown, helps determine appropriate next steps.

Contacting the Business

Attempting to contact the business directly is often a worthwhile initial effort. During a closing sale or transition period, businesses might honor gift cards to liquidate inventory or manage customer relations. Some businesses might announce specific dates or locations where gift cards will still be accepted, even for a limited time or specific merchandise. This direct communication can sometimes provide immediate, albeit temporary, solutions.

Filing a Proof of Claim

In formal bankruptcy cases, gift card holders can file a “proof of claim” with the bankruptcy court. Information on proceedings and filing claims is typically found on the U.S. Bankruptcy Court website for the relevant district. While gift card holders are generally unsecured creditors and full recovery is unlikely, filing a claim is the formal legal avenue to assert a right to any potential distribution. The process involves submitting a form detailing the amount owed and the claim basis, usually within a court-set deadline.

Credit Card Chargeback

If the gift card was purchased recently using a credit card, a chargeback might be a viable option. Consumers can contact their credit card company to dispute the charge, citing non-receipt of goods or services due to the business closure. Credit card companies often allow chargebacks if the purchase was made within a certain timeframe, typically 60 to 120 days. This process involves providing transaction details and evidence of the business closure.

State Consumer Protection Agencies

State consumer protection agencies or the Attorney General’s office can provide guidance and, in some instances, mediate for consumers. These agencies may have information on ongoing investigations or advise on specific state laws. While they may not guarantee a refund, they offer valuable insights and support, especially if the closure affects many consumers.

Small Claims Court

Small claims court is another theoretical option for recovering gift card value, particularly for smaller amounts. However, this avenue is often impractical due to the time and cost involved in pursuing a lawsuit, especially if the business has limited or no assets remaining. Even if a judgment is obtained, collecting the funds can be challenging if the business lacks the means to pay. Therefore, this option is generally considered a last resort for very specific circumstances.