Can You Redeem Gift Cards After a Store Goes Bankrupt?

Is your gift card in Chapter 11?

Last Christmas, a Sharper Image (SHRP) gift card could buy a home breathalyzer machine, a digital photo-displaying key chain, or a trip to a zero-gravity chamber in Nevada.

Two months later, the same gift card couldn’t be used for anything –except maybe a bookmark. That is because Sharper Image filed for bankruptcy February 19 and immediately stopped accepting its own gift cards. The gizmo retailer’s woes are evidence of a growing hazard for consumers: gift cards that become worthless when a company goes broke.

Bankruptcies at big national chains like furniture sellers Levitz Furniture and Bombay & Company left those holding gift certificates in the lurch last fall.

Analysts say the faltering economy will spell even more losses this year: Those with plastic promises in their wallets will lose at least $75 million in 2008, according to an estimate by the research firm TowerGroup. What’s behind this huge number? The swan-diving economy is intersecting with the surging popularity of gift cards. According to the National Retail Federation, consumers spent $26.3 billion on gift cards during the last holiday season, that's second only to clothes in gift popularity.

“We’ve seen failures in the economy before, but there wasn’t necessarily a lot of gift card use at those times,” says Tina Henson, founder and CEO of Plastic Jungle, a Web site that lets people buy, sell and trade gift cards.

Consider Linens-n-Things, the home décor store teetering on the brink of bankruptcy. (Linens-n-Things isn’t public so we can’t give you the ticker but GE’s Commercial Finance unit is the lead agent on a $700 million revolving credit facility to the company.