When is a gift card not a gift card? Answer: When the retailer goes bankrupt.

Would you ever lend money at a zero percent rate of interest? Even worse, would you ever lend money at no interest to a borrower with a poor credit rating? That is just what you are doing if you’re holding a gift card from a store that is headed toward bankruptcy. Circuit City stores have just filed for Chapter 11 bankruptcy protection. Owners of gift cards are creditors just like all other creditors that must get in line to collect when a company goes bankrupt. The best advice is to use it or lose it before the company actually enters bankruptcy. It is not clear whether Circuit City will continue to honor its gift cards. Once it enters bankruptcy it need no longer honor those cards. If you planned on giving a Circuit City gift card for Christmas, remember it is the thought that counts. The Wallet has links to helpful consumer information on the Circuit City bankruptcy.

In an interview with the News Observer an editor from Consumer Reports had the following good advice.

They take your money as a pledge against something in the store and then that money, in a bankruptcy, is going off to Joe the plumber, or some other secured creditor, who has priority over a gift card holder.

It's always a good year not to buy a gift card," he said. "I'm not sure what the benefit of them is anyway. They're not like a real thing the person wants, they're not as good as cash. ... Cash you can use. Uncle Sam is probably not going to file bankruptcy.

If you're buying presents ... offer to wax someone's car, get them something they really need, or just hug 'em. That's what the holiday is really supposed to be.

The California Department of Consumer Affairs provides this advice.

What happens if the seller of the gift certificate or gift card files
bankruptcy?

A gift certificate or gift card sold by a seller that seeks bankruptcy protection may have no value. However, the holder of the certificate or card may have a claim against the bankruptcy estate.

Sellers that file "Chapter 11" (reorganization) bankruptcy intend to stay in business, so they typically will ask the bankruptcy court for permission to honor gift certificates in an effort to maintain good customer relations. If the bankruptcy court does not allow gift certificates or gift cards to be honored, or if the seller files "Chapter 7" (liquidation) bankruptcy, holders of gift certificates or gift cards are creditors in the bankruptcy case. They have relatively high priority among unsecured creditors in a Chapter 7 case, and may receive some percentage of the certificate's or card's value, but only if the bankruptcy estate has enough assets to pay claims.

For information on filing a claim, and other basic information on bankruptcy, see "Consumer Tips on Retail Store Bankruptcies," under the "Publications" tab at http://www.dca.ca.gov/, and then go to the "Consumer Publications" section, for the list of consumer publications. A recently adopted California law is intended to help gift certificate and gift card holders when the seller declares bankruptcy. It requires a seller in bankruptcy to honor gift certificates issued before the date of the bankruptcy filing.22 No court has ruled on the effectiveness of this law.

Update on Circuit City at the Wallet