smart spending

Bitten by a bankrupt business? Bite back

Highlights
  • Try to call the business to get your goods or services back.
  • Gift cards may or may not be honored.
  • Proof of claim can move a consumer up the bankruptcy chain.

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."

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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.

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