For many retailers, Chapter 11 does not mean the end of their selling days. For shoppers, however, all sales should be considered final.
This is one piece of advice provided by bankruptcy experts for consumers wondering where on earth it is safe to shop these days.
They have reason to wonder. Nine retailers have filed for Chapter 11 bankruptcy protection so far in 2017, already matching the number that filed in all of 2016. These merchants include The Limited, BCBG Max Azria, Payless ShoeSource, Wet Seal, RadioShack and HHGregg.
In addition, Macy’s, Sears, J.C. Penney and others have each announced they will shutter more than 100 stores (Penney has delayed its closings, but still plans to shutter 138 locations).
For consumers, this presents a range of considerations from whether to put an item on layaway to shopping a particular store at all. But bankruptcy does not necessarily spell demise, said Stephen Newman, an attorney at Stroock & Stroock & Lavan in Los Angeles.
“The purpose of Chapter 11 bankruptcy is to reorganize the business and to restore it to efficient operations and to profitability, if possible, in a manner that will allow creditors to be paid,” Newman said. “For example, less heavily trafficked locations may be closed to preserve resources for the parts of the business that are more successful.”
From “Stuff” To Experiences
A key cause of the rise in retail bankruptcies can be traced to a redirection of spending, from physical “stuff” to experiences, such as meals and entertainment. Sales at bars and restaurants, for example, have advanced at twice the rate of retail since 2005, according to The Atlantic.
Shoppers are dramatically channeling more of their retail dollars to online-only merchants such as Amazon. Amazon’s North American sales accelerated five-fold from 2010 to 2016, to $80 billion from $16 billion.
Considering Amazon’s revenue exceeds that of Macy’s, J.C. Penney, Sears Holdings and Limited Brands combined, it’s understandable why so many merchants are struggling.
4 Caution Areas
So what does this mean to the average shopper? That can depend, in part, on how the retailer operated beforehand. If it provided good service and quality products, shoppers should have less to worry about, Newman said.
However, bankruptcy experts advised against certain types of transactions and suggested some precautions when making purchases. Following is their counsel to consumers.
1. Gift cards
Several experts warned against buying gift cards, even though such purchases may be protected.
“If you have a gift card, you’ll want to use it right away,” said Jef Henninger of the Law Offices of Jef Henninger in New Jersey. “The court will likely set a deadline for when gift cards can be used. Gift card holders who miss the deadline can file a claim to recover the value of the cards. However, those claims will be processed after the company’s major creditors, and there may be nothing left over.”
Put simply, the situation is just too uncertain to take the risk, said Robbin Itkin, bankruptcy attorney at Liner Law in Los Angeles. “Typically motions are filed immediately to have such items honored in the bankruptcy case — but you just don’t know what the situation may be, so it’s safer to not do anything that requires further obligations of the store.”
If in doubt, consumers can check the retailer’s bankruptcy administration website to confirm it has court approval to honor gift cards, said Angela Ferrante, senior vice president of operations at Garden City Group, a legal administration firm with offices in New York, Seattle and Ohio.
Similar to their views on post-bankruptcy gift cards, many attorneys advise against buying anything on a layaway plan.
“Holding onto store credits and purchasing products on layaway [is] too risky,” said Michelle Novick, a partner in the bankruptcy practice of Arnstein & Lehr in Chicago. “As a bankruptcy professional, my motto is ‘Use it or possibly lose it!’”
This is especially the case since shoppers aren’t guaranteed notice if a retailer shutters its stores. “You will never see the doors closing,” said Erik Klein at Klein Law Group in Boca Raton, Florida. “A customer makes weekly payments and one day shows up to take the item and the store is closed.”
Bankruptcy often means no guarantees, and that extends to warranties. Shoppers should read the fine print of all warranties before buying one. It’s also not a bad idea to research the brand warranty online to learn what other customers have experienced, said Richard Weltman, an attorney specializing in bankruptcy and creditor’s rights at Weltman & Moskowitz in New York and New Jersey.
“Look for exceptions, exclusions and gaps in coverage,” he said. “Pass up warranty or tech support offers if you can afford to self-insure.”
Lastly, he advises against purchasing any warranty program unless it is backed by a financially strong third party that’s unrelated to the retailer. “Don’t be pressured to buy on the spot.”
4. Credit cards and caution
All of this being said, educated shoppers should take advantage of the sales offered by retailers in bankruptcy protection, but know they may not be able to make returns.
“Shop sales. There will be plenty [to keep them afloat,]” said Travis Vandell, CEO of JND Corporate Restructuring in Denver. “Don’t wait. If you want something, buy it while it still exists.” But, he adds, keep the receipt: “Computer systems may be in flux.”
When it comes to paying for those purchases, shoppers should opt for credit cards, said Klein, from Klein Law Group. This at least provides the shopper with a record of the purchase and many cards offer purchase protection plans.
Lastly, consumers should sharpen their bankruptcy radar. Empty racks with steep sales, closing stores and a reduction of floor staff can all be indicators a retailer may be headed for bankruptcy protection. It’s up to the consumers to protect themselves.