Pitfalls of out-of-business sales

Points of no returns (or repairs)

In most cases, all sales are final. If you buy something that turns out to be defective or damaged, you're going to have a tough time getting a bankrupt store to repair the product or give you a refund (that is, unless you live in a state that legally requires the seller to do so).

To protect yourself, make sure the item you purchase comes with a manufacturer's warranty, Dworsky says, and pay with a credit card. As long as your product is still covered by the manufacturer's warranty, you can probably get it replaced or repaired. If you'd prefer to get your money back, and the store refuses a refund, you can try to charge back the purchase with your credit card company.

In this case, a consumer writes the card issuer, indicating how the product is defective and requesting that the item be taken off his or her bill. The card company then contacts the merchant to get the other side of the story, Dworsky says. If the card issuer agrees with the consumer, the charge is removed from the bill.

If you spent $170 to get a one-year extended warranty on that Sony laptop computer from CompUSA, you aren't entirely out of luck. CompUSA arranged with a third party to take over its service agreements. But that may not always be the case.

And it should go without saying that you shouldn't buy any extended warranties or service agreements from retailers that are in the process of going out of business. California's Department of Consumer Affairs advises consumers to look for a warranty on the product independent of the retail store.

Gift-card holders are out of luck . . .

When a company files for bankruptcy, all of the parties it owes money to -- lenders, vendors, former employees -- stand in line hoping to get at least some of their money back. In this queue, gift-card holders and those who have store credit bring up the rear and rarely get anything.

"In bankruptcy, there will be a pot of money that has to be distributed to those who are owed money, but it will not generally be enough to give everyone 100% of their losses," Dworsky says. "How much each person gets and in what order is what the bankruptcy court determines."

According to California's consumer-affairs agency, if there are no assets in the bankruptcy estate for unsecured creditors, such as gift-card holders, they receive nothing.

One glimmer of hope for these consumers is if the company intends to reorganize after it declares bankruptcy, says John Rao, a staff attorney at the National Consumer Law Center in Boston. As long as the company stays in Chapter 11 bankruptcy, which means it intends to reorganize, emerge from bankruptcy and continue doing business, there's a chance consumers can redeem their cards.

Keep in mind, though, that most Chapter 11 bankruptcies eventually end up in Chapter 7, which means the company plans on ceasing business operations for good.

. . . especially if they don't act fast

Gift-card holders do have recourse, Rao says. Because gift cards are bought as a deposit for goods to be picked up in the future, Rao believes cardholders should have priority over other unsecured creditors. To make sure cardholders get what is due them, he suggests they fill out a proof of claim form with the bankruptcy court. But consumers have to act fast. The window to file these claims is typically within 90 days of the company's bankruptcy filing.

Forms can be found on the U.S. Bankruptcy Court's Web site, the company's site or that of a third-party firm handling the restructuring. According to Sharper Image's gift-card policy on the company's Web site, customers who want to redeem their cards must purchase merchandise equal to twice the value of the card. So if you have a $25 gift card, you'll need to buy something worth at least $50 in order to use it. Customers who don't want to redeem their gift cards can file claims, but there's no guarantee of payment.

Shop defensively

Unfortunately, there's no way to know if a company is going to go out of business until it's announced.

"When it's two weeks before Christmas, you're at the mall and the music is playing and the stores full, no one would think a month and half later they would go out of business," says Melissa Horne, an attorney at Providence, R.I., law firm Winograd, Shine and Zacks. As retailers continue to grapple with declining sales, it pays to think about where and how you shop.

Consumers shopping for big-ticket items or gift cards can check with the consumer-protection division of their state's attorney general's office for news or notifications about a particular retailer that may indicate whether they're struggling.

And if you have a gift card or store credit, it's probably best to spend it as soon as possible. "Don't throw the gift card away into an envelope," Dworsky says. "Use it as soon as you can because, whether it's a restaurant or retailer, so many companies go out of business."

This article was reported and written by Lisa Scherzer for SmartMoney.

Published May 9, 2008

READ MORE: GIFT CARDS - WARRANTY - SHOPPERS - RETAIL

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