What goes on to gift cards when a firm goes bankrupt? Can a company refuse to redeem outstanding gift cards during bankruptcy? Does it matter whether the corporation declared Chapter 11 or 7 bankruptcy? Is there federal or condition law regarding bankruptcy and gift cards? All these questions are the subject of this article.
Before answering the questions above, it is important to explain the difference in between Chapter 11 and Chapter 7 bankruptcy. A company typically files with regard to Chapter 11 bankruptcy protection in order to wants to work with creditors to change the particular terms of its debt obligations plus restructure its business in order to emerge from bankruptcy as healthy company. A Chapter 7 bankruptcy involves the liquidation of assets to pay creditors. When a firm files for any Chapter 7 bankruptcy, the company is certainly going out of business and would usually close all stores.
However , a business planning on liquidating can also file the Chapter 11 bankruptcy protection, as with the case of KB Toys Incorporation, which filed for Chapter 11 bankruptcy protection in December 2008 however the company plans to liquidate its entire business and close just about all stores. A company would typically file a Chapter 11 to liquidate in order to gain more control since it sells off assets. Therefore , for this article, what is important is whether the personal bankruptcy is to reorganize or liquidate, rather than whether it is a Chapter 7 or even 11.
The decision to honor gift cards during bankruptcy, regardless of whether that is a reorganization or liquidation is the sole decision of the company, with authorization from the judge overseeing the bankruptcy. After the bankruptcy is filed with all the court, the company will file what is called “first-day motions”, which seek approval from the judge on problems like how the company plans to pay its workers, including whether it plans to honor gift credit cards. Gift Card redemption requests are typically approved by the judge, although the judge may deny them for whatever reason.
Consequently , when a company decides not to recognition gift cards during bankruptcy, it is because they either decided not to petition the particular judge for approval to do so, or maybe the request was denied by the assess. Generally, it is more of the former compared to latter. Considering the fact that some companies go into bankruptcy with millions in excellent gift card obligations, a company ought to expect consumer backlash and stress from politicians if it decides never to honor millions in gift cards during bankruptcy. This happened towards the Sharper Image when it initially decided not to honor about $20 million in gift card when it filed with regard to bankruptcy liquidation in early 2008. After pressure from both consumers along with a number of state Attorney Generals, the organization relented and allowed gift credit card holders to redeem their present cards if they purchased goods really worth twice the value of their gift credit cards.
Companies that file for bankruptcy reorganization possess several incentives to redeem present cards during the reorganization. First, not what a company planning to stay in business really wants to do is upset current clients, and refusing to redeem present cards is a sure way to do that. Second, gift card holders typically spend more than the gift card value. So redeeming gift cards throughout a tough time helps the company boast sales. Third, it prevents competitors through stealing customers. When The Sharper Picture initially refused to honor present cards during bankruptcy, competitor Brookstone saw and opportunity to gain a lot more customers by offering Sharper Picture gift card holders attractive special discounts if they surrendered their gift credit cards to Brookstone. Finally, honoring present cards during bankruptcy helps to task a “business as usual” image, which is what a company planning to stay in business should hope to project to its customers.
Companies that seek bankruptcy relief liquidation have less of an motivation to redeem gift cards, since they don’t plan to stay in business.
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Nevertheless , there are a number of reasons why it is a good idea to honor gift cards throughout liquidation. First, it is the right action to take. Consumers purchase gift cards with the expectation that they or their recipients will be able to redeem them during a reasonable timeframe. Refusing to honor gift credit cards breaks this trust and makes the gift card holders victims associated with unfair business practice. Second, buy honoring gift cards during the get-out-of-business sale, the merchant will be able to move inventory quickly since gift card holders typically spend as much as 20% more than the card value. This after that becomes a win-win situation for each.