Borders Bankruptcy Strikes Fear in the Hearts of Gift Card Holders

by Mercator Advisory Group 0

Book seller Borders Group Inc. filed for bankruptcy in February and has been struggling to avoid liquidation ever since. Despite its best efforts, the company is now closing up shop. The liquidation has led to a number of calls in the media, such as this article from Incentive Magazine for consumers to spend their gift cards as soon as possible.

A number of consumer organizations urged gift card holders to redeem them immediately. While some stores likely will stay open past this week, there is no guarantee—and little likelihood—that the gift cards will continue to be honored by the liquidators once they take over.

Gift card holders have been burned in past bankruptcies where they were told by courts to get in line with all the other debtors. That is certain a possibility in this case as well, but so far, the company seems to have been allowed to honor its cards, as noted in this article (http://ctwatchdog.com/2011/07/20/borders-accepting-gift-cards-and-loyalty-program-discount-but-read-terms):

Connecticut Attorney General George Jepsen is advising consumers that Borders Group will begin going-out-of-business sales in its remaining stores in Connecticut on Friday and conclude them on or before Sept. 30.

According to terms filed with the federal Bankruptcy Court, Borders gift cards will be accepted in retail stores and online during the closing sales. Borders Rewards Plus Loyalty Program discounts will be honored in retail stores and online, for the first 14 days of the closing sales.

Of course, once the stores close, there will be little recourse for any customers with outstanding cards, so they will need to spend them as soon as possible. Bankruptcy courts should, but don’t always, recognize that allowing gift card redemption will lead to creditors recovering more funds. This is because they will help the liquidation process and because shoppers holding gift cards tend to spend much more than the face value of a the card. In bankruptcy liquidation, that potential uplift is likely to be even higher as cardholders perceive the discounts combined with gift cards as an even greater deal.

For more on the history of gift cards and bankruptcy, please see the report “New Opportunities for Closed-Loop gift Cards” (http://www.mercatoradvisorygroup.com/index.php?doc=Prepaid&action=view_item&id=533&catid=16).

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