A Borders Bankruptcy May Mean a New Round of Trouble for Gift Cards

by Ben Jackson 0

Rumors are circulating in the press thatbookseller Borders Group may file for bankruptcy as soon as nextweek. Already the Internet is abuzz with advice to consumers thatthey should redeem their gift cards and loyalty rewards as soon aspossible. On January 27, the company announced that it received a$550 million secured credit facility from GE Capital, and it wasstill promoting its gift cards on its Web site.

The company said in its release that one of its key strategy piecesgoing forward will be to expand the Borders Rewards Plus Program.Currently, the program gives repeat shoppers “Borders Bucks” thatthey can redeem for merchandise.

If Borders does go bankrupt, it could raise some uncomfortablequestions around its gift cards. In a bankruptcy, the company couldask the court for permission to continue honoring its cards as away to drive sales. If the judge agrees, then consumers holding thecards have time to redeem them. If not, then the consumers holdinggift cards could be told to get in line with all the othercreditors of the store, which means they are not likely to seethose funds again.

The second option would further shake consumer confidence in giftcards, and possibly in prepaid cards in general. It could lead tocalls for laws that would require gift card funds to be set asidein a trust fund, for example.

As the retail industry watches and waits to see what happens toBorders, gift card program managers should consider what they willtell customers if Borders cards suddenly lose their value.