The Gift Card Comes Wrapped in Growing Risk
By ALINA TUGEND

I FELT extremely prepared and clever last year when I rented the family’s ski equipment for the entire season at a discount place, avoiding the expense and hassle of renting at the slopes.

It all worked out well until I learned — just about when I was going to return the stuff — that the ski rental store was closing and that those who had received their skis after a certain date in November would not get their deposits back.

We could keep the rental skis and boots, which was fine for me, but pretty useless for my sons, who would grow out of them by next season.

Fortunately, I discovered that we met the deadline (just barely) and got our hundreds of dollars in deposits back. But that was when I truly understood the term “unsecured creditor.”

That was, um, me. Meaning I had basically lent the company money (by renting) and they had not given me any collateral in exchange other than the used — and soon to be too small — skis and boots.

You know who else is an unsecured creditor? You, if you are in possession of a gift card. And you may be right to feel pretty insecure.

Just to put the numbers that we’re talking about in perspective, the TowerGroup, a research and advisory firm, projects that $59.9 billion will be spent on gift cards linked to a specific restaurant or retailer this year.

That compares with $70 billion that consumers spent on the cards last year. This is the first year that spending actually went down since 2001, when gift cards became widely available, said Brian Riley, a senior analyst with TowerGroup.

Spending on gift cards from financial institutions, like MasterCard or Visa, is expected to rise, however, to $28.5 billion from $27 billion, TowerGroup said.

“People have become more cautious” in buying retailer gift cards, Mr. Riley said, “and they should be.”

Just this year, consumers lost about $100 million in gift cards that they could not use when major retailers went out of business, Mr. Riley said.

The trouble is, there is no standardized procedure for handling gift cards after a Chapter 11 bankruptcy filing. The store does not necessarily shut down. Nor does it automatically stop taking — or for that matter, selling — gift cards. But it can.

Take these three recent examples:

¶ When the Sharper Image filed for bankruptcy protection in February, customers were told it would not accept outstanding gift cards. Then the company agreed to redeem them, but only as sort of a discount coupon if customers bought a certain amount of merchandise. Mr. Riley said consumers ended up losing about $60 million in Sharper Image gift cards.

¶ To redeem your gift card at Linens ’n Things depends on when it was bought. A spokesman for the company responsible for selling the inventory and closing the 371 Linens ’n Things stores said that no cards should have been sold after Oct. 17, the day the going-out-of-business sale began. If you bought one before that, you can still use it — if you can still find an open store. You cannot use it online.

¶ Many consumers have been worried about Circuit City, which entered bankruptcy protection this month, but a Circuit City spokesman, Jim Babb, said that the company would continue to sell and accept gift cards, regardless of when they were bought.

Greg Daugherty, executive editor of Consumer Reports, said his organization has “never been big on gift cards, and the collapse of retailers is just one more reason.” Even if a company continues to accept the cards after going bankrupt, local stores may close, making it harder for the consumer to use them, he said.

In September, Consumers Union, along with the Public Interest Research Group, the Consumer Federation of America and the National Consumer Law Center wrote to the Federal Trade Commission asking for greater protection for consumers with retail gift cards.

“Currently, unused gift card funds are treated as a debt,” the letter states. “The retailer may or may not request the court to allow it to continue to accept its gift cards. The consumer is left without the ability to use the card if the retailer does not make this request or if the court denies the retailers’ request. The consumer may be left with one option, which is the cumbersome task of filing a claim as an unsecured creditor in the bankruptcy proceeding to obtain the value on their gift card.”

For a $50 gift card? I don’t think so.

A spokesman for the Federal Trade Commission said it did not comment on such letters.

Bankruptcy aside, a large part of the problem is that the accounting practices regarding the sale and redemption of gift cards by retailers are not standardized, Mr. Riley said.

In addition, companies make millions of dollars selling cards that are never or only partially used.

Mr. Daugherty said that a recent telephone holiday survey by Consumer Reports found that 66 percent of respondents said they planned to buy gift cards, up from 62 percent last year.

But of the 62 percent who received gift cards in 2007, some 25 percent said they were still sitting in drawers somewhere, unredeemed. And of that 25 percent, more than half have two or more gift cards.

And here’s another reason that retailers love gift cards: In the Consumer Reports survey, 58 percent of consumers said they spent more than the gift card amount when they used it.

The Internet has rushed in to address the gift card dilemma. There are sites to swap and sell them, as well, of course, to buy them online. And after the wave of bankruptcies, some sites, like Leveragecard.com and giftcardrescue.com, are offering sort of a bankruptcy protection.

Leveragecard.com, for example, which sells more than 250 brands of gift cards, allows members to swap cards, and it keeps track of the mileage and rewards cards of members. Membership is free and there are no additional fees to buy the cards electronically; if shipped via post, there is a $1.99 charge.

After a number of retailers went bankrupt, Leveragecard.com instituted a policy allowing customers who had bought gift cards from its Web site to trade them in for another retailer’s card, said Jennifer Mathe, chief operating officer and co-founder of the year-old site.

Customers must notify Leveragecard.com within 30 days of a company’s bankruptcy that they want to make the exchange and must do it within 60 days of the retailer’s filing for bankruptcy and only if the company stops selling gift cards.

Kwame Kuadey, founder of giftcardrescue.com, said that if a company goes bankrupt, he will reimburse any unspent balance on cards that customers bought on his site within a year of purchase.

The final advice I received is that if you do get gift cards this holiday, don’t let them languish. Use them quickly to avoid any problems. And you won’t forget them.

I have never liked giving gift cards, finding them impersonal and boring. I enjoy shopping for presents, and when my nieces and nephews were small, I loved buying cute little outfits, cool picture books and funky toys.

But as everyone has grown older, my idea of a cute outfit seems curiously out of step with a teenager’s, and a funky toy is more likely to require software than batteries.

This holiday season, therefore, I guess I will give out something I will simply call historical presidential portraits, available in easily foldable sizes.