How Bankruptcy Courts Treat Gift Cards: Understanding Your Consumer Rights

When major retailers file for bankruptcy, the fate of millions of dollars worth of gift cards hangs in the balance. But how bankruptcy courts actually handle these cards—and what rights consumers retain—remains a mystery to many shoppers. The answer depends on a critical distinction: whether the retailer plans to survive or shutter completely, and crucially, what the bankruptcy court decides.

The Court’s First Decision: Determining Gift Card Status

When a retailer enters bankruptcy proceedings, it must petition the court for permission to continue accepting gift cards. This is the pivotal moment where bankruptcy courts determine whether cardholders retain any value or lose their funds entirely. According to Shelley Hunter, a gift card expert at GiftCards.com, “When a store files for bankruptcy, the urgency is even greater” because the window to use accepted cards often closes within days or weeks.

Bankruptcy courts evaluate each situation individually. Toys R Us, which filed for protection in September 2017, quickly gained court approval to continue accepting gift cards while operating its 1,600+ stores through the holiday season. The court’s decision reflected the retailer’s stated intent to continue operations. However, when The Limited announced store closures before filing in January 2017, shoppers had zero opportunity to redeem cards—the court authorized no grace period.

Priority and Payouts: Where Gift Card Claims Actually Land

Understanding how bankruptcy courts rank creditors is essential to grasping why gift card holders face uphill battles. In bankruptcy liquidation (Chapter 7 proceedings), the court establishes a strict creditor hierarchy. Secured creditors—banks and landlords holding collateral—receive priority. Unsecured creditors, a category that includes gift card holders, occupy the lowest rung.

As Pamela Banks from Consumers Union explains, gift card holders must “stand in line with a tin cup” and hope remaining assets exist after secured creditors receive payment. This means filing a “proof of claim” in bankruptcy court as an unsecured creditor, a process that can stretch months with no guarantee of recovery.

The outcome depends entirely on whether assets remain. Sometimes they do, sometimes they don’t. Holders must provide proof of ownership—typically the gift card’s activation receipt—to substantiate their claim.

A Legal Precedent: RadioShack’s $46 Million Settlement

The 2015 RadioShack bankruptcy illustrates how activism can sway bankruptcy court decisions. When RadioShack ceased accepting gift cards, state attorneys general applied pressure on the court, resulting in a landmark settlement: the company paid $46 million to reimburse consumers holding balances. Cardholders had one year to file claims, and courts treated these claims as top priority over general creditors.

However, bankruptcy experts caution that this outcome is exceptional, not the norm. Charles Tatelbaum, a bankruptcy attorney at Tripp Scott, emphasizes the rarity of such favorable rulings for gift card holders.

Protection Strategies: Acting Before Bankruptcy Strikes

Given how bankruptcy courts typically handle gift card claims, consumers should adopt preventive measures. Pay attention to financial signals from retailers in your portfolio. If a store shows signs of distress—like Sears and Kmart have displayed—avoid purchasing its gift cards.

Consider prepaid cards issued by major payment networks instead of retailer-specific cards. These function across multiple stores, mitigating the impact of any single retailer’s failure.

If you already hold a troubled retailer’s gift card, use it immediately. The moment bankruptcy becomes public, courts often restrict card acceptance to brief periods. Speed matters more than almost any other factor.

The Final Option: Credit Card Chargebacks

If all bankruptcy court processes fail and no recovery materializes, you retain one final avenue: the chargeback. If you purchased the gift card with a credit card, request a chargeback from your card issuer. This sidesteps bankruptcy court proceedings entirely, though success varies depending on card policies and transaction timing.

Bottom Line: How Bankruptcy Courts Weigh Gift Card Rights

Ultimately, bankruptcy courts balance retailer interests against consumer rights on a case-by-case basis. Some decisions favor cardholders; most do not. Understanding that courts rank gift cards as unsecured claims—last in line for any remaining assets—explains why recovering value proves so difficult. Your best defense remains using gift cards before financial trouble strikes, keeping activation receipts as proof of ownership, and monitoring retailer health continuously.