Last week, the Home & Garden experts at Consumer Reports reported that Circuit City -- the nation’s second-largest electronics retailer -- would close nearly one-quarter of its U.S. locations because of poor sales.
Yesterday, as we reported here, Circuit City filed for Chapter 11 bankruptcy protection, which will allow the company to remain in business while dealing its financial woes. When a company petitions the court for such protection, management continues to run the daily business operations but all significant business decisions must be approved by a bankruptcy court.
A Circuit City spokesperson told us that the chain would seek approval from the court to honor its returns, exchanges, and gift cards. Approval of such programs normally is granted, the spokesperson said.
Bankruptcy expert Howard Brownstein, a principal of NachmanHaysBrownstein, Inc., agreed that the court is likely to approve such a request, but there’s no guarantee. If a company like Circuit City wants to emerge from bankruptcy and remain in business, he says, it’s critical that the chain honor its obligations such as extended warranties and gift cards.
With the dreadful economy, Circuit City has plenty of company in bankruptcy court these days, including Mervyn’s, The Sharper Image, Bennigan’s, Steve & Barry’s, and Linens ‘n Things, to name a few.
While the company stated in a press release that it will continue to honor its “customer commitments,” (we’ve contacted Circuit City to find out exactly what that means), when a chain files for Chapter 11 protection, customers usually aren’t a top priority.
Although bankrupt companies still maintain assets, they’re doled out to the firm's long line of creditors -- lenders, suppliers, attorneys, the courts, and employees with wage claims. Guess who’s generally at the end of the line? Also, the reality is that some businesses seeking bankruptcy protection ultimately fail, and there simply aren’t enough assets to go around to pay off everyone with a claim.
If you’re thinking about shopping at Circuit City, or any store that’s on the brink, there are a few things that you need to know to avoid becoming a creditor:
- Know whom you’re dealing with. Particularly in this climate, it’s important to know whether the company you’re buying from is solvent. One helpful site is the American Bankruptcy Institute, which keeps on top of the latest headlines and features plenty of helpful information.
- Contact the Better Business Bureau or your local consumer protection agency to determine whether other shoppers are having problems with a particular merchant.
- Pay by credit card. If a business goes bust and you haven’t received the merchandise you paid for, you can dispute the charge with the card issuer. You might also be protected if there’s a problem with the quality of the goods for which you’ve already been billed. If you pay by cash, check, or debit card, you usually have less recourse.
- If you have a gift card use it immediately. If not, it could become worthless.
- Avoid buying gift cards from merchants in Chapter 11. We’re not a big fan of gift cards from stores with or without financial difficulties, since many come with onerous fees and expiration dates. Also, a new holiday poll by the Consumer Reports National Research Center revealed that one-quarter of all Americans who received a gift card last year still haven’t used it -- because they didn’t have enough time; forgot about the card; couldn’t find anything they wanted; the card expired; or they lost it.
- Verify warranty coverage. Ask the store or third-party warranty issuer if your extended warranty or service plan is still valid. The chance of business failure is yet another reason to avoid an extended warranty for most products. Consumer Reports has surveyed readers for years about their experiences with broken products, and in almost every instance our data suggests they just don’t pay.
- File a claim with bankruptcy court. If a merchant owes you money and the company goes broke, file a Proof of Claim form as soon as possible with the court where the company has filed for bankruptcy. You can get a proof of claim form from any bankruptcy court or online. If you apply as a priority creditor, you might move ahead in the pecking order. Even so, such claims could take several years to resolve.
A complete listing of the Circuit City stores that are being closed can be found here. Click on “breaking news” for additional information.
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