The holiday season’s upon us, and so are the gift cards. Merchants small and large are selling the colorful plastic cards. There are some $50 billion worth a year in gift cards sold by retailers in the U.S.. In healthier economic times, gift cards can be the perfect solution for everyone. Gift givers don’t need to wrestle with the problem of predicting recipients’ preferences. He’s not unwrapping packages only to find a garment in the wrong size; she’s not getting one in a color she detests. From retailers’ point of view, the concept is brilliant. The cards provide instant cash flow weeks or even months before purchases actually take place. Sometimes the cards are lost or forgotten, and the purchase never takes place, with the merchant, of course keeping the money paid by the gift giver.

As a bankruptcy attorney in Indiana for so many years, I usually find myself urging people to be cautious about their spending. When I’m working with clients to prepare all their budget pages and lists of expenses, of course, it’s crucial to curtail luxury spending of all sorts. Later, post-bankruptcy, clients who’ve filed a Chapter 7 bankruptcy need to get back in a pattern of regularly paying bills and managing spending, while Chapter 13 post-bankruptcy clients need to learn to manage their income and keep up with their three to five year debt repayment plans. Using gift cards can actually help clients keep their gift spending within limits, saving on expensive wrapping paper and bows.

With corporate bankruptcies on the rise, though, gift card holders could end up in the same boat as airline ticket holders were when their airlines went bankrupt before they took their trips. In my earlier bankruptcy blog, Airline Ticket Holders Are Unsecured Creditors In Bankruptcy. I explained that, after an airline files bankruptcy, even if their PR people are saying they’ll honor all tickets, it’s really up to the bankruptcy court to decide whether that airline will be shut down or continue to operate. Since ticketholders are unsecured creditors, any proceeds from the sale of the airline’s assets will go first towards paying secured debts (mortgage, equipment loans, etc.).

Last holiday season, the same thing happened to Sharper Image gift card holders. Tens of thousands of folks showed up in person or online, expecting to use their gift cards to acquire the latest gadgets, only to learn that the cards had become worthless pieces of plastic following Sharper Image’s bankruptcy. More than a dozen U.S. retailers have filed Chapter 11 bankruptcy so far this year, and just as many have begun the process of closing their doors. Circuit City’s the most recent big retailer bankruptcy example, but Shoe Pavilion, Steve&Barry’s, Mervyn’s, Lillian Vernon, Hollywood Video, and Steve and Barry’s have all begun the process.

This year, therefore, in addition to my usual admonitions about keeping credit and debit card spending in check during the holiday season, I’m advising extra caution when it comes to gift card buying. If you’re going to give someone a gift for the holidays, you want them using that gift with a smile, not frustrated with plastic that can’t become a present!