A post about Schubach Jewelers’ bankruptcy prompted a question from a reader. She asked, “I have a warranty on a piece of jewelry. What happens now?”
It’s a great question but, unfortunately, one that doesn’t have a happy answer (probably).
Gift cards and warranties are often outstanding in a corporate bankruptcy. They are common marketing techniques. If you don’t know what a person wants as a gift, give a gift card. To help when unexpected repairs arise, buy a warranty. Gift cards are outright debts: the customer has given the company money; in return, the company gives the customer a card that says “you have $X in credit at the store.” In other words, the business owes the holder of the gift card the face value of the card.
In a bankruptcy, a gift card can be treated just like any other debt. If there is a distribution or payment made to creditors, holders of gift cards will get their fair share of that distribution. Say the company returns 2% to its creditors. The holder of a $100 gift card would be paid $2. The gift card would then have no value. If there is no distribution, there is no payment and the card is worthless.
Warranties are slightly different. Under a warranty the customer gives the business money and the business promises to make repairs to its merchandise, if repairs are needed. If no repairs are needed, at the end of the warranty, the warranty becomes worthless. There’s no obligation on the part of the business unless and until something goes wrong.
A warranty is what is known as an executory contract. An executory contract is an agreement under which one or both parties still have obligations to fulfill. In the case of a warranty, that obligation is to repair any defective merchandise if necessary. Since it isn’t certain that any particular piece of merchandise will require repairs, there is no duty under a warranty as long as the merchandise operates.
In bankruptcy, a debtor can either accept or reject an executory contract. Accepting means the debtor agrees to abide by the terms of the executory contract and fulfill his duties. To reject means just that: the debtor says, “I am no longer bound by this agreement.” The other party to a rejected executory contract has a claim for damages caused by the rejection. In the case of a warranty, that means that if the customer makes a claim under the warranty, that claim will be treated as a debt and be entitled to the same pro rata payment as other debts.
Whether you have a gift card or a warranty, the likelihood is that if the company that issued either files bankruptcy, you are out the cost of the card or the warranty.
If you have bankruptcy questions, contact us. We’re here to help.