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When gift-card promises go unfulfilled

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A lot of money is at stake, says Brian Riley, director of bank-card research for TowerGroup, a global financial services research firm in Needham, Mass. Mr. Riley estimates the 2008 prepaid gift card market is about $94 billion. And since 10 percent of gift cards are never redeemed in their entirety, some $9 billion in unused funds remain in retailers' coffers, TowerGroup reports.

The current economic crisis should also spur buyers to be more conscientious, says Jennifer Mathe, cofounder of Leverage, an online company which sells and trades gift cards.

"If the holiday season doesn't pan out [for retailers] … you're likely to see a higher increase in bankruptcy in the New Year," she says. "And I'm not familiar with any retailers who stopped gift-card sales before filing for bankruptcy."

Retailers face little regulation about what they must do with money they receive from selling gift cards. "When funds go in, they're booked to the general funds of the store," Riley says.

"Rapid consumer acceptance of the product during good economic times has created a fallback for merchants to use when their cash flow begins to dry up," Riley wrote in a May 2008 TowerGroup report. In an interview, Riley adds that this practice, called breakage, is legal and based on the assumption the funds on some cards will never be redeemed.

But shifting funds can leave coffers empty and gift card holders out of luck when a retailer files for bankruptcy.

The only legal recourse open to card holders in that situation is to file as an "unsecured creditor" with the bankruptcy court.

But analysts say it's usually not worth the effort. For many, the return would be pennies on the dollar.

"At the end of the day you are a little consumer, still in line with thousands of other consumers," and unsecured creditors often get repaid last – if funds are available, Riley says.

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