New Yorkers get gift-card reprieve in KB Toys bankruptcy

It’s hard to imagine a toy store going out of business during what’s supposed to be the busiest time of the year, but that shows you how bad times really are. On Dec. 11, the 461-store KB Toys chain filed for bankruptcy protection — for the second time in four years — and is selling off its remaining inventory at fire-sale prices before shutting its doors for good.

There’s no direct mention of the bankruptcy on KB’s Web site unless you happen to click on “in-store specials.” A screen pops up that says, “Going out of business. Entire store at least 40% off. Everything must go.” The only other clue appears if you try to buy or use a gift card, when you’re informed that they’re neither for sale any longer nor redeemable online.

When the chain filed for bankruptcy, in Delaware, the court authorized — but didn’t require — KB Toys to honor gift cards. Even if the chain accepts its gift cards today, the policy could change tomorrow or at any time, without notice, rendering the cards worthless. The company sold as much as $2 million in gift cards this year alone, and currently holds a total of $12 million in unredeemed gift cards.

That prospect didn’t sit well with New York State Attorney General Andrew Cuomo, who on Tuesday announced he’d hammered out a commitment from KB to honor its gift cards purchased by New Yorkers at least through Jan. 11 at the company’s walk-in stores. The company also agreed to honor any outstanding merchandise credits shoppers might be entitled to.

In addition, New Yorkers who bought merchandise on lay-away have until Dec. 31 to pick up the items by paying the balance due.  KB further committed to notifying the Attorney General and to post signs in stores at least 10 days in advance of any decision to stop honoring New Yorkers’ gift cards. KB Toys operates 60 stores in New York. If you live in another state, you might check with your state’s AG’s office to determine whether they’ve hatched any similar agreement with the Massachusetts-based retailer.

Consumers who don’t redeem their gift cards, can seek reimbursement of any remaining balance by filing a priority proof of claim in KB Toys’ bankruptcy proceeding. The New York Attorney General has more information here. Be warned, however. The process could take years and you might get back only pennies on the dollar.

A report documenting the risks associated with gift cards is available on the Attorney General’s website (PDF), which describes many of the hidden traps consumers face when attempting to use the cards. The report cites a recent Consumer Reports Holiday Poll, which noted that one of four gift cards bought in 2006 hadn’t been used as of December 2007.

According to an MSNBC report, KB’s business model had focused largely on selling closeouts rather than hot toys. The chain, the report says, aggressively cut prices, offered hundreds of toys for $10 or less, and expanded its value program, which offered weekly deals on new arrivals.