On Wall Street, lawmakers are talking about how "toxic debt" threatens banks and lending. Out on Main Street, shoppers better start thinking about "toxic" gift cards from companies that could go bankrupt. They won't be worth the plastic they are printed on.
There's a new realization that holding a gift card from a troubled retailer is like having a bank account without FDIC insurance.
It's not an idle worry.
Shoppers spent an estimated $26.3 billion on gift cards at retailers last Christmas season, compared with $24.8 billion in 2006 and $18.5 billion in 2005, according to the National Retail Federation.
"I am very wary of gift cards this year and do not plan to use any of them at all during the holiday season. I simply do not trust the companies unless they put on a label saying that they are fully returnable at face value," said Dr. Richard Glassock of Laguna Niguel, a retired UCLA medical school professor.
Already some big retailers, including Sharper Image and Bombay Co., have filed for bankruptcy protection, leaving gift card holders with millions of dollars of what the Bankruptcy Court considers unsecured debt. Both chains have since closed.
Consumers Union said that when Sharper Image filed for bankruptcy protection this year, it left an estimated $20 million on unused gift cards, and maybe as much as $40 million when merchandise certificates and related promotional cards were included. At first Sharper Image said it would not honor the credits. Later it successfully petitioned the court to allow it to accept gift cards if consumers spent twice the value of the gift card on a single transaction.
"That wasn't such a good deal, and who knows if anybody used their cards that way," said Anthony Giorgianni, associate editor of Consumer Reports, which is published by Consumers Union.
In August, home-furnishing retailer Bombay Co., which closed 388 stores, won approval from a U.S. bankruptcy judge in Fort Worth to pay off gift card holders 25 cents on the dollar.
Gift card holders could lose more than $75 million just from store and restaurant closings in 2008, said Brian Riley, senior analyst at Tower Group, a consulting firm.
"The only way that number will change is up," Riley said.
Consumer groups are worried about how little shoppers are protected when spending all that money. In September, a coalition of organizations asked the Federal Trade Commission to protect shoppers from losing money on gift cards when retailers file for bankruptcy protection.
