Consumer groups ask FTC for tougher gift card protections

Consumer groups filed a petition Thursday asking federal regulators to do more to keep consumers from losing money on gift cards from bankrupt retailers.

The petition was sent to the Federal Trade Commission and spearheaded by the California office of Consumers Union, which was joined by the Consumers Federation of America, National Consumer Law Center and U.S. PIRG. The request follows a tough year for stores -- and those left holding their gift cards. "The issue has come to light following recent retailer bankruptcies and millions in lost gift card dollars for consumers," the press release says. Earlier this year, Sharper Image customers were initially left holding worthless gift cards when the gadget retailer declared Chapter 11.

When a store runs into trouble, its gift cards can quickly become little more than pieces of plastic.

"Bankruptcy courts treat unused gift card funds as a debt and determine whether or not the retailer must pay it. It's up to the retailer to petition the court to allow it to continue to accept its gift cards," the press release says. "Consumers may lose the value of their gift card if the retailer doesn't make such a request or if the court denies it. In these cases, the only remaining option for consumers is the cumbersome task of filing a claim as an unsecured creditor to the bankruptcy proceeding." That means consumers have to get in line behind other creditors when a store goes belly up.

Consumer groups don't think it should come to that. "We made the filing to try to upgrade consumer protections on cards that are poorly protected," says U.S. PIRG consumer program director Ed Mierzwinski, adding that the goal is to eventually bring all card products up to the Truth in Lending Act. "People think all plastic is the same -- it isn't," he says.

Among plastic payment forms, credit cards offer consumers the best protections, while stored-value cards (including gift cards) are the worst, Mierzwinski says. Among that category of stored-value cards, "the worst gift cards, in general, are the gift cards issued by a bank," he says. Some mall gift cards may actually be issued by a bank, Mierzwinski warns.

The petition asks that the FTC:

* Take part in bankruptcy proceedings and ask that the court require the bankrupt company to accept its own gift cards at full value while the retailer's doors remain open.
* Create and keep a new FTC registry on bankrupt retailers' gift card practices.
* Require stores to update the new FTC registry within one day of a bankruptcy filing.
* Force bankrupt companies to halt gift card sales no later than the date of the bankruptcy filing.
* Compel retailers to tell third-party vendors to stop selling any bankrupt retailers' gift cards.
* Require third-party vendors to immediately stop selling bankrupt retailers' gift cards.

Mierzwinski says eventually his group and others plan to ask Congress to improve protections on all forms of plastic. As for the petition currently under consideration, "We're looking forward to the FTC's action on it," he says.