How Retailer Bankruptcies Affect You

Many people see the retail industry slumping this year because of the continuing credit crisis, meaning Americans can’t borrow as much to continue our spendy ways, and increased prices across the board, meaning Americans can’t buy as much with the money they still have. Either way, there are only a few ways that a retailer bankruptcy actually affects you. First, let’s take a look at what actually happens when a retailer goes bankrupt. Then, we’ll talk about how this affects you.

Retailers Going Bankrupt

When a retailer goes bankrupt, it’s almost irrelevant to the consumer what type of bankruptcy protection they file for because the effects are the same. Chapter 11 means they want to soldier on, restructure their debts, and try to get back on its feet. Chapter 7 means the business is kaput, everything is going to be liquidated, and there’s no hope for the company.

How This Affects You

Gift Cards: Either way, a retailer in bankruptcy protection will see all of its gift cards frozen and made worthless. This is the greatest impact on the consumer and one reason why I argue that you shouldn’t hold onto gift cards. When Linens ‘n Things and Sharper Image filed bankruptcy earlier this year, both froze gift cards. There are exceptions and those often occur in the case of Chapter 11 bankruptcies, where the retailer will still honor gift cards, because they want to keep good will. If they freeze gift cards but still keep stores open, it’s less likely that consumers will shop there after they’ve been “screwed.”

Another scenario is when those gift cards are made worthless by the bankrupt retailer, other retailers may swoop in and offer discounts to those holding the worthless gift cards. It’s akin to airlines offering fare discounts to those holding bankrupt airline tickets.

Liquidation Sales: Just because the retailer is going under doesn’t mean you’ll find any good deals. CompUSA’s liquidation sales were awful, Shaper Image liquidation sales were awful, and Bombay liquidation sales were awful. When the items were overpriced in the first place, it’s hard to justify paying “normal” price for something you can never return. However, there are always deals to be found if you’re diligent but don’t expect a fire sale just because the retailer is bankrupt.

Returns: You’re probably out of luck on returns with a bankrupt retailer. Any purchases you make after they’ve declared are definitely not returnable, in fact they will probably put up huge signs in the store indicating “all sales are final” and “no returns.” As for purchases before they went bankrupt, you might be able to return it but I doubt it. If the retailer is really going away, there’s no reason to accept the return. If the retailer is restructuring, you might be able to return it but I wouldn’t bet on it.

A retailer going bankrupt is never a good thing, even if you’re a bargain-hunter swooping in, because a lot of people will have lost gift card value (in the case of Linens ‘n Things, ~400,000 lost around $42M in gift card value!), the sales will probably suck, and you lose another sales-tax, income-tax paying shop in your neighborhood.

(Photo by paul keleher)