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With worsening economic conditions, consumers should think twice about purchasing gift cards from retailers and cards issued by banks and credit unions, advise the editors of Consumer Reports Money Adviser.

Gift cards may seem like the perfect holiday present, unless you’re left holding cards from Sharper Image, Bombay Company, Levitz, company-owned Bennigan’s restaurants and other failed or financially ailing businesses.
As economic worries mount, some experts predict that gift-card sales will be lower this holiday season than last. Still, for the year, consumers are expected to plunk down a total of $94 billion on the cards.

Retailer bankruptcy filings over the past year have left holders of millions of dollars of gift cards with no apparent way to spend that money. Some bankrupt retailers have obtained court approval to continue honoring their cards, certificates, and other customer obligations. But even then, the closing of a chain’s poorest-performing stores—as often happens during bankruptcy reorganization—might make it difficult for consumers to redeem their gift cards, especially if the retailer doesn’t accept cards on its Web site.

Because of the risk, it’s wise to avoid buying cards from financially distressed retailers. But determining which companies are in trouble could be difficult. For example, Sharper Image was selling gift cards right up to the day it filed for bankruptcy protection, when it stopped accepting its cards. And the Web sites of some bankrupt retailers CRMA recently checked into made no mention of the store’s precarious financial position, at least not on their home or gift-card sales pages

With the U.S. economy on shaky footing, retailers are not the only companies at risk of going under. More than 20 federally insured banks and credit unions had failed this year as of early October. As with retailers, banks and credit unions could place their pre-paid gift-card revenue into custodial accounts, and take other measures to ensure the money goes to cardholders in case of a failure. CRMA’s editors didn’t find many that do that.

“This may continue to be a problem even after the holiday season,” said Noreen Perrotta, finance editor, Consumer Reports. “Consumers need to aware of the potential risks of buying gift cards from financially troubled stores and institutions.”

If you’re considering buying a card:

• Avoid troubled issuers. Don’t buy a card from a retailer or financial institution that you know is      in trouble. Check the company’s Web site, including its shareholder’s pages and news releases.      Do a Google search of the issuer’s name with such words as “financial trouble.”
• Hand over documentation. Give the recipient a copy of the terms and conditions on the card, plus your receipt.

If you’re the recipient of a gift-card:

• Use it fast. Spend the entire value quickly to reduce your risk of getting stuck with a worthless card if the issuer fails. Holding on to a card also increases the chance that it will be lost, stolen, or just forgotten. Unused cards have been a boon to issuers.
• Register it. Doing so will allow you to make a claim in the event that a failed issuer properly set aside gift-card proceeds. Registration may also be necessary if you need to replace a lost or stolen gift card.
• Check the terms and conditions. Look for expiration dates, replacement policies, and fees. To see a summary of your state’s gift-card laws, go to www.ConsumersUnion.org/finance/StateGiftCardLaws.htm.

If the issuer of a gift card you hold gets into financial trouble, here are a few options:

Redeem the card now. If the issuer hasn’t failed, spend the remaining balance immediately. If it’s a retail card  and local stores close, find out if you can redeem it on the retailer’s Web site.

Try a chargeback. If the card was bought with a credit card, the purchaser might be able to      obtain a chargeback from his or her credit-card company.

Contact the third-party issuer. If the card came from a third party, find out whether it will                           provide a refund or otherwise make good on the card. Third parties include supermarkets,            independent gift-card Web sites, and financial institutions that offer retail cards as part of their         reward programs.

File a claim.  As a last resort, you can submit a claim to the bankruptcy court.Look for the name of the court by checking on the bankrupt retailer’s Web site or by doing a Web search.

Consumer Reports Money Adviser is a monthly newsletter that answers tough money questions and provides expert financial advice. Its proven information and successful strategies make any financial decision an easy one. Each month, CRMA provides feature articles and helpful investment, savings, and spending advice that will prepare consumers for anything life may bring them.

The full report is available in the December 2008 issue of Consumer Reports Money Adviser and online at http://www.consumerreports.org/cro/money/shopping/shopping-tips/new-risks-with-gift-cards/overview/new-risks-with-gift-cards-ov.htm.