This is a guest post from Kwame Kuadey, CEO & Founder of GiftCardRescue.com, a site for selling and swapping gift cards. Kwame is also author of GiftCardBlogger.com, a blog about gift cards.

What would you do if you purchased a gift card today and found out next week that the gift card issuer had gone bankrupt? The current economic meltdown has driven some well-known companies to file for bankruptcy:

These bankruptcies have left thousands of people in a panic about what to do with the gift cards they hold to these merchants. As the economy worsens, more retailers are expected to go out of business. So, how do you protect yourself from ending up with a gift card that you can no longer use?

Get on the phone
If your gift-card issuer files for bankruptcy, the first thing you should do is call the nearest store to find out if they are still accepting gift cards. Companies that file for bankruptcy can petition the bankruptcy court to allow them to continue the redemption of gift cards, as seem recently with Linens ‘n Things and Steve & Barry’s.

If they are still accepting gift cards, you should use your card immediately. In some cases, the company may not allow you to redeem the full value of the gift card, which is what happened with The Sharper Image bankruptcy, where gift-card holders were only allowed to redeem about 50% of their card value.

If the company is no longer accepting gift cards, there are a few other options available.

Friendly competition
In some cases, the competition may accept your gift card. A quick search on Google news will give you information about whether competitors are running special promotions targeting gift-card holders of the bankrupt company.

For example, when The Sharper Image went bankrupt, competitor Brookstone offered Sharper Image customers an instant 25% off Brookstone purchases in exchange for their Sharper Image gift card. Also, when Bennigan’s went out of business, competitor Texas Roadhouse started a promotion where holders of Bennigan’s gift cards could exchange them for a free entrée certificate that was good for any item on their menu.

While these promotions may not help you redeem the full value for your card, they do offer the opportunity to get some of your money back.

Take ‘em to court
Another option is to file a claim against the assets of the company with the bankruptcy court. Information on how to do this can be found on the company’s website.

When you buy a gift card, you are essentially giving the issuer an unsecured loan until you redeem the full value of the card. Should the company go bankrupt and decide not to honor gift cards, you can file a claim with the bankruptcy court like any other creditor.

However, since gift card holders are unsecured creditors, they fall at the bottom of the pecking order by which creditors are paid, which means that your chances of getting all your money back are slim.

Go to the government
For local and small businesses that go bankrupt, a better option is to petition the office of your state Attorney General to see if they can get the owners of the business to honor outstanding gift cards.

A recent success story out of Missouri is a good example. In that case, a local spa in the St. Louis area, Spa 151, suddenly went out of business, leaving several hundred gift card holders with worthless gift cards. More than 300 consumers filed complaints with the Attorney General’s office alleging that they held gift cards that could not be redeemed. The Missouri Attorney General was able to get the former owners of Spa 151 to pay up to $103,000 to redeem the cards and certificates.

The best offense
There are also steps you can take proactively to protect yourself from ending up with a bunch of worthless gift cards. The most important advice is to pay attention to what is going on with the gift card issuer.

This is by no means asking you to become an expert in analyzing the financial statements of these companies. However, if this is a shop that you visit often, you will get a sense for whether or not they are doing well. If you are always the only one shopping at the store, that should tell you something.

Also, store closings and layoffs are clear signs that all is not well with the company, and perhaps, you should not buy a gift card from that retailer. For example, if you currently hold a gift card from Circuit City, I strongly urge you to use it now! There is a real possibility the company may have to file for bankruptcy, and you don’t want to be left with worthless gift cards.

Photo by Stephen Yeargin.

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