When retailers fail, gift card holders often lose out

There's an interesting story on USA Today's Web site about precautions to take before buying gift cards as presents this holiday season.

When stores file for bankruptcy, as is happening more frequently in the present economic downturn, people with gift cards have little protection.

When Sharper Image filed for bankruptcy, for example, people had to spend twice the amount of the gift card in a single purchase in order to redeem it, the article notes. In the case of the failed Bombay Co., gift card holders were paid off to the tune of 25 cents on the dollar.

The article does list some useful tips for smart gift card giving and receiving. Among them are:

1. Know the financial health of the company. Avoid buying gift cards for businesses that are on the verge of filing for Chapter 11 bankruptcy protection.

2. Look for gift cards with flexibility. Consider a mall gift certificate, which can be used at any number of stores, or a gift card offered through a major credit card company. There may be fees attached to these "open loop" gift cards, but at least you're not limited to a particular retailer.

3. Use 'em or lose 'em. Try to redeem gift cards promptly, say by Jan. 1. The longer you wait, the more likely the retailer will go out of business and your card will lose value.