Bankruptcy and Gift Cards Explained

What takes place to gift playing cards whilst a agency goes bankrupt? Can a organisation refuse to redeem first-rate gift playing cards at some stage in financial ruin? Does it be counted whether the organization declared Chapter 11 or 7 financial disaster? Is there federal or country law regarding bankruptcy and gift playing cards? All these questions are the situation of this article.

Before answering the questions above, it’s far vital to provide an explanation for the distinction among Chapter 11 and Chapter 7 financial ruin. A organisation commonly documents for Chapter 11 bankruptcy safety whilst it desires to paintings with creditors to change the terms of its debt duties and restructure its business with a view to emerge from financial disaster as healthy company. A Chapter 7 financial ruin involves the liquidation of assets to pay creditors. When a firm files for a Chapter 7 financial disaster, the business enterprise goes out of commercial enterprise and might commonly close all shops.

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However, a corporation making plans on liquidating can also file a Chapter 11 financial ruin protection, as in the case of KB Toys Inc, which filed for Chapter 11 financial ruin safety in December 2008 despite the fact that the organization plans to liquidate its complete enterprise and near all stores. A organization might typically document a Chapter 11 to liquidate so as to benefit extra manipulate as it sells off assets. Therefore, for this article, what is essential is whether the financial ruin is to reorganize or liquidate, rather than whether or not it is a Chapter 7 or eleven.

The choice to honor gift cards throughout financial disaster, no matter whether or not it’s a reorganization or liquidation is the sole selection of the employer, with approval from the judge overseeing the financial disaster. After the bankruptcy is filed with the courtroom, the agency will report what’s referred to as “first-day motions”, which searching for approval from the choose on troubles like how the organisation plans to pay its people, along with whether or not it plans to honor present cards. Gift Card redemption requests are commonly authorised with the aid of the choose, despite the fact that the judge can also deny them for whatever reason.

Therefore, when a agency comes to a decision no longer to honor gift playing cards during financial ruin, it is because they both decided not to petition the choose for approval to achieve this, or the request became denied with the aid of the judge. Generally, it’s miles extra of the former than the latter. Considering the fact that some companies pass into financial disaster with tens of millions in first-rate present card obligations, a organisation must count on customer backlash and pressure from politicians if it makes a decision not to honor hundreds of thousands in present cards at some point of bankruptcy. This took place to the Sharper Image while it to start with decided no longer to honor approximately $20 million in gift card when it filed for bankruptcy liquidation in early 2008. After stress from both clients and some of kingdom Attorney Generals, the organisation relented and allowed gift card holders to redeem their present playing cards if they purchased goods really worth twice the price in their gift playing cards.

Companies that document for financial ruin reorganization have several incentives to redeem present playing cards in the course of the reorganization. First, the closing thing a company making plans to stay in enterprise wants to do is disappointed modern-day customers, and refusing to redeem present playing cards is a sure way to do this. Second, present card holders generally spend greater than the present card value. So redeeming present cards for the duration of a tough time helps the company boast sales. Third, it prevents competitors from stealing clients. When The Sharper Image initially refused to honor present playing cards at some point of bankruptcy, competitor Brookstone saw and possibility to benefit extra clients by using presenting Sharper Image gift card holders attractive reductions in the event that they surrendered their gift cards to Brookstone. Finally, honoring present playing cards at some stage in financial ruin helps to mission a “commercial enterprise as normal” picture, that is what a agency making plans to live in commercial enterprise ought to desire to challenge to its customers.


Companies that record for financial ruin liquidation have less of an incentive to redeem gift cards, due to the fact they do not plan to stay in enterprise. However, there are a number of reasons why it is a great idea to honor gift playing cards at some point of liquidation. First, it’s miles the proper issue to do. Consumers purchase present cards with the hope that they or their recipients can be able to redeem them at some point of an affordable timeframe. Refusing to honor gift cards breaks this trust and makes the present card holders sufferers of unfair commercial enterprise exercise. Second, buy honoring present cards at some point of the get-out-of-enterprise sale, the service provider may be capable of circulate stock quickly on account that gift card holders typically spend as a lot as 20% greater than the card value. This then will become a win-win state of affairs for both parties.