Senator Chuck Schumer wants Toys “R” Us to cash out unused gift cards.
“The music is about to stop for the iconic retailer,” Schumer said in a statement on Wednesday, “and consumers could be left in the lurch.”
The struggling company declared bankruptcy in September. The retailer announced on Wednesday that it is closing all of its UK stores. It is expected to close its US stores for good as soon as this week.
Schumer said that once the liquidation is complete, gift cards could be “as worthless and unwanted as a lump of coal in a stocking.” He also wrote a letter to Maureen Ohlhausen, acting chairwoman of the Federal Trade Commission, asking the FTC to make sure the retailer is doing everything it can to honor the gift cards.
A representative from the senator’s office said Schumer reached out to the FTC after hearing from concerned constituents.
Toys “R” Us is currently honoring its gift cards. If the company closes all of its stores, it may no longer let customers cash them in.
A company’s customers tend to land “pretty close to the bottom of the totem pole” in bankruptcy cases, said Brian Davidoff, a financial restructuring attorney for Greenberg Glusker.
Judges usually make bankrupt businesses pay their secured creditors, like bank lenders and vendors, first. Customers with gift cards are unsecured creditors, Davidoff explained.
If Toys “R” Us wants to honor gift cards after the bankruptcy filing is complete, it should ask the bankruptcy court to prioritize customers. If that happens, the secured creditors can raise an objection.
It’s up to the bankruptcy court to decide if Toys “R” Us can honor the cards.
If that happens, it’s unlikely that customers would receive a cash redemption, Davidoff explained.
“Lenders are going to fiercely resist that,” he said.
Bankrupt retailers may eventually honor a gift card, even if they don’t right away, said FTC spokesperson Frank Dorman. But a competitor may be willing to honor a gift card given by a bankrupt company, he noted.
“If you buy a gift card from a company that files for bankruptcy or goes out of business, it may be worth less than you had anticipated,” Dorman said.
So if you’ve got Toys R Us gift cards lying around, you might want to buy something soon.