Gift cards: A bad idea gets even worse

By Liz Pulliam Weston

I've long objected to gift cards because they're lousy substitutes for real presents -- the kind that require thought, care and knowledge of the recipients' tastes.

These days, though, they can be a real waste of money, too.

That's because gift cards typically lose all their value if the issuer slides into bankruptcy. Sharper Image, Bombay, Levitz and Bennigan's, among others, have left cardholders with worthless plastic.

The number of abandoned gift card recipients is sure to grow as a troubled economy sinks more retailers and restaurant chains. TowerGroup, a research firm, has estimated consumers could lose more than $75 million this holiday season to company bankruptcies that wipe out gift card values.

• Tell us: Do you love or hate gift cards?

Consumers Union, the publisher of Consumer Reports, has been warning about this risk for months. In September, the consumer advocacy organization urged federal regulators to make gift cards safer by requiring issuers to segregate proceeds from card sales into separate accounts that wouldn't be wiped out in corporate bankruptcy.

In addition, Consumers Union asked that regulators:

• Stop retailers from selling gift cards after they file for bankruptcy.
• Ban third parties from selling gift cards of bankrupt retailers.
• Force bankrupt retailers to continue accepting their cards as long as they remain open for business.

When Sharper Image first filed for bankruptcy reorganization, for example, it stopped accepting its gift cards, then accepted them for a limited time if a customer spent at least twice as much as the card's value, then stopped accepting them again before going out of business entirely.

Cardholders are considered unsecured creditors in a bankruptcy filing, which places them at the back of a long line of companies and people clamoring for pieces of the bankrupt carcass.

If Consumers Union's suggestion to segregate gift card proceeds were implemented, that could make gift cards a better bet. But so far, regulators haven't acted on any of its petitions.

A new hazard, but not the only one

The very real risk that a card can become worthless comes on top of their other hazards, such as:

• Fees and expiration dates that can reduce or wipe out the value of an unused card.
• The fact that so many people don't use their cards.

One in four gift card recipients last year still hadn't used their cards when polled in an October 2008 Consumer Reports survey. TowerGroup estimated that $8 billion of the $97 billion in gift cards sold last year hasn't been spent.

That should give pause to the people who justify giving plastic cards because they don't want to "waste money" on a gift that's never used.

But I can't endorse Consumer Reports' solution to the risks posed by gift cards. The magazine suggests giving cash instead -- which would be, of course, my worst nightmare.

I think the holidays should be more than a mutual exchange of dollar bills. As I wrote in "Gift cards are not gifts," the process of selecting a real present forces us to think hard about the other person and anticipate what might delight him or her.

If you're stumped, check out my recent column "20 great gifts that aren't gift cards" and its predecessor, "20 easy gifts -- that aren't gift cards."

If you're still having trouble, maybe it's time to get to know the recipient better or to end the gift exchange.

Continued: 7 rules for buying gift cards

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