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Borders Gift Cards and Bankruptcy: Time Not to Panic

By Wendell Sherk, Missouri Bankrupcty Attorney

Borders, the national book store with actual stores, may have to file bankruptcy soon.   Is that going to mean disaster for its customers?  That’s very unlikely.

Borders Group has hired bankruptcy lawyers.  It is taking (even) longer to pay for inventory to conserve cash.  This is a predictable dance by heavily leveraged retailers in a down economy, especially retailers in declining actual store businesses competing with Internet retail — like Amazon.

If they stay independent, this is a company that’s very likely to file bankruptcy.  But that’s not a death sentence anymore than it is for the millions of families that file every year.  Borders is doing what it needs to do to recognize, reorganize, and try to move on.  They’ll probably close a lot of stores and layoff (more) employees.  What won’t they get rid of?  Their customer retention programs.

A gift card from Borders is, technically, a debt they owe to you.  So is the Rewards Plus program.  If they file you’re screwed, right?  Probably not.  And yes, some employees are complaining about being encouraged to sell Rewards Plus.   I’ve heard these comments repeatedly on the Internet.   I’m sure Borders is hearing it too. These worries are more about how little folks know about Chapter 11 than the reality.

It is possible if Borders actually fails then these things will be worthless.  But Borders, like many overleveraged companies, is not flopping.  And its creditors probably don’t want it to fail (except for those who have a bigger “short” investment than their loans out to the company).  Retailers are rarely worth more to anyone dead than alive.  So the creditors need to play ball eventually — perhaps even end up owning the company.  And a deal will be worked out, to allow the company to shrink to hopefully become a viable concern.

But why honor the gift cards and reward programs?  Because selling books to people is what they do!  And getting customers to come back by giving them a little discount and a perk every now and then is well worth the cost.  This is why every airline that files bankruptcy asks the court — with creditor agreement — to allow them to honor their frequent flier programs, often as part of the very first things they ask to do.

Keeping customers coming back is how you stay in business.  And if you’re closing a lot of stores — something that could be a key benefit for Borders in bankruptcy — then making those customers happy is going to be harder.  So  Borders won’t hurt the customers unless they have no other choices, after taking a bite out of their suppliers, lenders, and employees.

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Full post as published by Bankruptcy Law Network on January 25, 2011 (boomark / email).