How’s this for a nightmare scenario? You go to pick up your dry cleaning on the morning of a job interview only to find the lights out and the doors locked. A small sign on the door reads: “Closed for good.”

Recent high-profile bankruptcies by Circuit City and Linens ‘n Things have woken Americans up to an unpleasant reality: Businesses go out of business, and they often create big problems for their customers in the process. 

Gift cards, extended warranties, items being serviced and deposits are all put at risk when a business goes bust. And in the current dismal economy, the likelihood that you’ll be affected only increases. According to the American Bankruptcy Institute, 43,546 businesses filed for bankruptcy last year, compared with 28,322 in 2007 — a 54 percent increase.

What do you do if a business shuts down when it has your stuff or owes you money, goods or services?

“I wish there was an easy answer to that,” says John Rao, attorney for the National Consumer Law Center. “It really will depend on how they shut down. There are some places that might just shut the doors, and there isn’t any legal proceeding. In a legal proceeding that’s initiated by the business, the consumer needs to find out what that is, because it will impact the outcome.”

Larger businesses, especially national chains, usually file bankruptcy while their doors are still open. Smaller mom-and-pop businesses sometimes don’t, says Makoto Shuttleworth, a bankruptcy attorney with Price Law Group in Encino, Calif. “For example, with a dry cleaner, a lot of times they wouldn’t even file bankruptcy, or they wouldn’t file bankruptcy while they’re in operation,” Shuttleworth says.

Where’s my stuff?

If you have property that’s in the possession of a closed-down business — clothing at a dry cleaner or a car at an auto shop — the first thing to do is try to contact the business and retrieve your property. If the business isn’t answering phone calls, e-mails or letters, the next step is to call your state attorney general’s office.

“They may be able to either take some legal action to try to get access to any property that’s there or take other steps to help consumers,” says Rao. “They would probably know whether there’s been a state receivership-type action or a state proceeding or whether it’s in a federal bankruptcy court.”

The Massachusetts attorney general’s office, like many state attorney general’s offices, has a consumer division that specifically deals with resolving issues between aggrieved consumers and businesses.

“A trained mediator on our staff would attempt to contact the business owner,” says Amie Breton, a spokeswoman for the Massachusetts attorney general. “The business owner and the consumer would both tell their side of the story to the mediator, and then the mediator would try to come to a resolution.”

If the owners don’t respond, aren’t willing to participate in mediation or are caught up in a legal proceeding like bankruptcy, the attorney general’s office will notify the consumer and refer him or her to an appropriate government agency or, in some cases, an outside lawyer.  

If you do end up going to court, depending on state law, you should have a pretty good chance of getting your property back.

“When products or goods are in a service-type situation, usually the consumer doesn’t lose their ownership right on the item, so it doesn’t become property of the business,” says Rao. “There may be some liens on the property that the service provider has based on work that’s been done, but they’re going out of business, so generally you ought to be able to get it back.”

Still, even in open-and-shut cases, legal fees can quickly add up to more than the item in question is worth.

But we had a deal …

Extended warranties, gift cards and certificates, and advance payments are another frequent casualty of busted businesses.

Warranty programs administered by outside companies are the most likely to survive a business bankruptcy. Assurant Solutions, the company that provided extended warranties to Circuit City customers, pledged earlier this year to stand behind its warranties despite the liquidation of the electronics retailer. That’s likely music to the ears of people who shelled out hundreds of dollars for such warranties.

However, as soon as a business files for bankruptcy, warranties, gift cards and advance payments managed in-house by that business come under the sway of a bankruptcy court. If the company at some point is bought by another company or manages to emerge from bankruptcy, then consumers will probably get paid. But if the company can’t salvage a viable business or find a buyer, they begin the liquidation process. At that point, many customers with ties to the business probably aren’t going to get what’s coming to them.

Gift cards are a frequent casualty. “There’s nothing specifically in the bankruptcy law that requires those cards to be honored,” says Rao. “So it’s really going to be whether or not the judge will permit it.”

The Bombay Co., a nationwide furniture and home goods retailer that filed for bankruptcy last year, won approval to pay off gift cardholders. The only catch: Cardholders got 25 cents on the dollar — not exactly a great deal. A few months after The Sharper Image filed for bankruptcy, it allowed consumers to cash in their gift cards, as long as their purchases totaled twice the value of their cards.

Even when the court approves the continued use of the cards — as in the bankruptcies of Linens ‘n Things and Circuit City — if a company’s bankruptcy reorganization fails and it’s forced to close stores and liquidate, the time frame for using gift cards shrinks dramatically. So it pays to redeem the cards at the first scent of bankruptcy trouble.

If a company can’t win approval to accept the cards — and in some cases, it won’t even request it — then gift cardholders must fill out a court document called a proof of claim and submit it to the bankruptcy court. At that point, you become a creditor of the bankrupt business. You won’t be the only one seeking payment.

Those who made advance payments, say for an annual subscription to a magazine or a year’s membership to a gym, are in a similar boat. Unless there’s some kind of a settlement worked out on their behalf by the failing business, they’ll be part of the bankruptcy, too.

Retrieving a deposit

If you put down a large deposit for a product or service, whether it was to get in line for an in-demand new car or a not-yet-built condo, a failed business is especially bad news.

Depending on state law, such deposits may be required to be held in escrow by a third party, and many builders and other businesses that take large deposits do just that. In that case, it’s easy to get your money back. If the deposit was on a condo in California’s Inland Empire area, where property values have tanked, you’d probably be happy just to get your deposit back.

Unfortunately, many businesses will cannibalize these deposits and put them into their general pool of funds. If that’s the case, you, too, will be joining the list of creditors in the business bankruptcy.

So what does that mean, exactly? Think of bankruptcy like a pyramid. At the top of the pyramid are secured creditors. They’re the most likely to get paid before the bankrupt business’s assets run out. At the bottom are unsecured creditors, and there are typically many more unsecured creditors than secured creditors. Ultimately, the bankruptcy judge decides who gets paid and who doesn’t.

As a consumer, your objective should be to get as far up the pyramid as you can because, undoubtedly, by the time they get to the very bottom of the pyramid, the business’ assets will be gone. After all, if the business had the assets to pay off all its creditors, it probably wouldn’t be in bankruptcy.

One way you can climb to the middle of the pyramid is by filling out a proof of claim.

“If they do file a proof of claim, they are entitled to a priority as a consumer-type claim,” says Rao. “If it’s a deposit that was left or for some payment for goods that weren’t provided, they are able to have a priority on up to $2,425. So as long as their claim is less than that amount, they would get a priority. If it’s more than that, they would at least have a priority for the first $2,425.”

If your deposit was much more than $2,425 — say $50,000 for the aforementioned condo — you’ll need to find legal help. “When there’s that much money at stake, a consumer really ought to consult with an attorney,” says Rao.

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