shopping mall

How Retail Bankruptcies Affect Consumers

June 28, 2009 07:00 AM
by Denis Cummings
As more retailers file for bankruptcy, consumers should be pay close attention to advanced payments, gift cards, warranties and other agreements with retailers.

Down Economy Forcing Retailers Into Bankruptcy

The world economic problems have forced many retailers into bankruptcy, such as Circuit City, Mervyn’s, Filene’s Basement and Eddie Bauer. As retailers continue to struggle, consumers should be aware of the problems they might face.

A retailer that files Chapter 11 bankruptcy is able to remain open and serve customers as it reorganizes its company. But a retailer forced into Chapter 7 bankruptcy shuts its doors and liquidates its assets to pay creditors.

In the past, a Chapter 7 retailer would typically be bought by another company that would assume its obligations and re-open. However, in these economic times, fewer retailers are being bailed out and their obligations to consumers are going unfulfilled.

In bankruptcy cases, consumers are considered unsecured creditors who will not be compensated until after employee wages and secured creditors are paid. This means that it is difficult for consumers to reclaim money or services owed to them by a retailer in bankruptcy.

Advanced Payments

Consumers who pay for a product ahead of receiving it may face problems if a retailer files for Chapter 7 bankruptcy. Both the consumer’s payment and the undelivered product are considered assets that will be distributed by the bankruptcy court.

If you have products or services that haven't been delivered, you might get burned,” says The Washington Post. “However, if you paid for a product or service with a credit card, you might get your money back. You can dispute any charges with the lender that issued the credit card using the Fair Credit Billing Act.”

Gift Cards

In retail bankruptcy cases, many retailers, at the order of the bankruptcy judge, will no longer honor gift cards. This issue was brought to the forefront last year when Sharper Image went bankrupt and announced it would no longer accept cards; it later reached a deal with the judge to allow customers to redeem cards on purchases of more than twice the card amount.

Experts recommend that consumers buy gift cards from larger retailers that are unlikely to go bankrupt, or to buy gift cards from credit card companies. Gift card recipients are advised to use the card soon after receiving it.


In many cases, consumers will have their warranties honored even if a retailer goes bankrupt. “If a retailer goes out of business, the consumer might be able to rely on the manufacturer's warranty,” says Kelvin Collins of the Better Business Bureau of Central Georgia, adding that many extended warranties are covered by third parties.

Still, consumers should carefully inspect a warranty before buying from a retailer nearing bankruptcy.

Chrysler and GM

Automakers General Motors and Chrysler each declared bankruptcy recently and are in the process of shutting down many dealerships. Despite their financial troubles, the two companies, with the backing of the Treasury Department, say they will honor all warranties. Car owners will also be able to get scheduled maintenance on their car at other dealerships if theirs is shut down.

Car owners may have problems, though, if they have deals arranged with specific dealers. For example, Collins told the Macon Telegraph, if someone trades in a car for a new one with a dealership that goes out of business before paying the loan on the trade-in, the “original owner could be liable for making payments on both cars.”

Accident victims will also find it difficult to receive compensation from the automakers. The “new” post-bankruptcy Chrysler is no longer liable for products sold before the bankruptcy filing; GM will likely receive the same protection, reports the Detroit News.

Store Credit Cards

Consumers who owe money to a retailer are not let out of their obligation by the retailer filing bankruptcy. Store credit cards are customarily underwritten by banks or other third parties that will assume the debt of the card if a retailer goes bankrupt.

“Many people do stop paying, believing that if the store is bankrupt that they can keep the goods without ever paying for them,” said Babs Ryan, the ex-director of card services for General Electric, to “I can also tell you that the companies who own the assets (balances due) will do everything they are legally able to in order to collect those assets.”

Most Recent Beyond The Headlines