Understanding Gift Card Rights When Retailers Face Bankruptcy: What Bankruptcy Courts Treat as Priority

When major retailers file for bankruptcy, the fate of their issued gift cards often becomes a critical question in bankruptcy courts. The outcome depends largely on whether the company plans to continue operations or liquidate entirely—and how bankruptcy courts treat gift cards during this process.

How Bankruptcy Courts Treat Gift Cards: Chapter 11 vs. Chapter 7

Bankruptcy courts face a fundamental choice when a retailer files for protection. Under Chapter 11 bankruptcy reorganization, companies like Toys R Us—which filed for bankruptcy in mid-September and quickly gained court approval to accept gift cards—can continue accepting them if the bankruptcy court authorizes it. This scenario allows consumers to redeem cards at remaining stores or websites during the restructuring period.

However, the situation differs dramatically under Chapter 7 liquidation, where a retailer shuts down all operations. When The Limited closed its entire e-commerce platform and stores before filing for bankruptcy protection in January, shoppers had zero opportunity to use their gift cards. In such cases, bankruptcy courts rarely authorize continued gift card acceptance.

The Legal Reality: Your Position in Bankruptcy Court

Here’s where bankruptcy courts treat gift card holders as unsecured creditors—placing them at the back of the line. When a retailer liquidates, secured creditors like banks and landlords receive priority over remaining assets. Gift card holders must file claims in bankruptcy court, hoping funds remain after secured creditors are paid. This process can take months and often yields no recovery.

Pamela Banks, senior policy counsel at Consumers Union, explains that gift card holders must “stand in line” and hope leftover funds exist. The RadioShack case demonstrates both the challenge and rare exception: after RadioShack’s 2015 bankruptcy, state attorneys general forced the company to refund approximately $46 million to gift card holders. The bankruptcy court collectively treated these claims as a top priority, allowing claimants one year to file. However, Banks emphasizes this outcome remains unusual.

Timing Is Everything: How Bankruptcy Courts Treat Your Options

The critical variable is whether bankruptcy court authorizes a retailer to continue accepting gift cards post-filing. If approval is granted, consumers typically have days or weeks to redeem before cards lose all value. When RadioShack initially stopped accepting gift cards during bankruptcy, customers had no transaction capability until state intervention forced refunds.

Shelley Hunter, a gift card expert at GiftCards.com, advises using gift cards immediately. “The longer you hold onto a card, the higher probability you will lose the card or forget to use it,” she notes. “When a store files for bankruptcy, the urgency is even greater.”

What Happens After Bankruptcy Court Decisions

If bankruptcy court denies gift card acceptance, cards become temporarily worthless. However, some reorganized companies honor them post-emergence. Banks has witnessed instances where companies “reorganized, came out stronger, and honored gift cards.” Still, consumers must monitor the situation proactively.

For those unable to navigate bankruptcy court proceedings, chargebacks offer a last resort. If purchased with a credit card, cardholders can initiate chargebacks with their issuer. Alternatively, the original gift giver can pursue the refund.

Practical Steps to Protect Yourself

Monitor retailer financial health: Pay attention to news about stores where you hold gift cards. Sears and Kmart, experiencing severe financial difficulties, represent high-risk purchases.

Act immediately if trouble appears: Use gift cards from struggling retailers as soon as possible.

Keep activation receipts: Proof of ownership becomes essential if you need to file bankruptcy court claims. Recent improvements in the “proof of claim” process now allow most retailers to post claim procedures on their websites and on bankruptcy court websites.

Consider alternatives: Purchase prepaid cards instead of retailer-specific gift cards—they work at multiple stores and avoid single-company bankruptcy risk.

Lodge complaints: Contact your state’s consumer protection agency if you believe a retailer should accept gift cards. These agencies can pressure bankruptcy court decisions regarding continued card acceptance.

The uncomfortable truth is that bankruptcy courts treat gift card holders as lower-priority claimants. By understanding how bankruptcy courts operate and acting promptly, you can minimize the risk of being left with worthless plastic.