The Corporate Observer : Washington D.C. Class Action Lawyer & Attorney : Steven Berk Law Firm : Consumer Protection, Corporate Abuse : The Corporate Observer Blog

If you receive a gift card, USE IT as soon as possible.

As the holidays approach, with it comes the consternation and head scratching about what to get for your family and friends. For many, the answer to that question will be a gift card, but before putting down your money for a piece of plastic, consider whether your good intentions will actually result in something that the receiver can use. For those receiving a gift card, take heed of these dangers and use your gift card right away.

There are three main concerns that every consumer should have when purchasing a gift card:

1.      The gift card merchant may go out of business or declare bankruptcy

2.      A chain retailer may close the branches near to you

3.      Fine print: i.e. expiration dates and monthly fees.

1) If the gift card merchant goes out of business or files for bankruptcy, your gift card is probably worthless. That's right, even if the merchant doesn't actually shutter its doors and manages to restructure its debt through bankruptcy to continue operating, gift cards may still not be honored. In bankruptcy proceedings, unused gift cards are treated as a form of debt, and holders of gift cards are unsecured creditors. Even if a store wants to continue to honor gift cards, if they have filed for bankruptcy, it's up to the bankruptcy judge as to whether or not the store will accept them. If the judge says no, gift card holders are out of luck unless they file a claim with the bankruptcy court, and even then, there are no guarantees of success.

(Important note: Store credit, say, for items returned with a receipt and the like, are the same as gift cards. The credit is considered a debt and you are an unsecured creditor. If the merchant declares bankruptcy, you are, once again, out of luck.)

2) Merchants may close the store or stores near the gift card recipient. Gift cards are a heck of a lot less useful when the nearest store is 50 or 500 miles away instead of 5. In an age of overexpansion and some big companies cutting back their number of stores, this is a real danger.

3) Some gift cards may have fine print, such as an expiration date, a monthly fee for every month after X months, etc. Several states have outlawed these practices, but if your state allows it, the value of a gift card can be quickly eaten up in fees. Check the terms and don't let this happen to you.

The bottom line is that while gift cards are convenient, they carry a danger that the recipient won't be able to get the full value out of them. If you receive a gift card, USE IT as soon as possible. If you hold on to it until a later date, you run the risk that you will be unable to use the card.

Assisted by Jed Sorokin-Altmann

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What happens when a consumer needs to pay bills, but doesn’t have a credit or debit card? A new and increasingly popular answer is prepaid debit cards. This new business is booming. The New York Times reported on October 5^th that over $8.7 billion was loaded onto prepaid cards in 2008 alone. These cards offer the convenience of a debit/credit card without the credit check or bank account fees. Unfortunately, this is not the whole story. There is, quite often, a long list of fees including:

·      Activation fees

·      Convenience fees

·      ATM withdrawal fees

·      Balance Inquiry Fees

·      Purchasing Fees

Keep in mind; this is by no means an exhaustive list of fees connected with most prepaid cards.  I am not the first to raise the issue that some large companies may be taking advantage of their target markets: college students, and the uncreditworthy.

Of course the companies issuing the cards (small upstarts like Green Dot, Net Spend, and Account Now) have the right to a reasonable profit. We should also remember that without charging interest, fees will certainly be included in any of their schemes. My problem with the current system is that consumers are generally unaware of these fees which often end up considerably devaluing the money put on a card. This is a growing problem in the financial world and I think it’s time we found a solution.

Let’s look at an example:

This is a short sample of the fees that a consumer would incur with normal use of the MiCash prepaid MasterCard.

A deposit of $500

- $9.95 activation fee

- $17.50 (10 ATM withdrawals)

- $5 (5 ATM balance inquiries)

- $10 (20 purchases)

-$8 ($4 per month for “monthly maintenance”)

_________________________________________

Net Value: $449.50

A consumer using this card would have lost 10% of his or her initial payment just in fees by using this card normally for a two month period. Is this fair? Well, there certainly is precedent in the check cashing and pay-day loan industries for charging outrageous fees just for people to access their own money. However, even these questionable industries seem more willing to disclose fees than prepaid credit card companies.

Though prepaid cards may still be a better option than high interest credit cards or certain bank fees, many consumers rightfully feel that they are being charged fees without being made explicitly aware of them. The MiCash program in particular discloses the fees in the “terms and conditions” which are not directly posted on the application page – rather a user would have to follow a small link at the bottom of the application. This method of disclosing fees is perfectly legal, but is still deceiving. Nowhere on the application page does MasterCard mention any fees. In fact the only mention of fees is in reference to a lack of outrageous overdraft fees. However, it is clear in the fine print of the “terms and conditions” that overdraft or “negative balance” fees do indeed exist with the MiCash program.

We are not seeking an end to prepaid debit cards, nor are we seeking an end to all fees. All the common person is seeking is a fair representation of products, a clear warning that fees will be deducted from a prepaid card. Federal oversight should be the next step towards ensuring full and fair disclosure of fees. The industry is relatively new and has not been subject to a substantial amount of governmental review. Perhaps legislation will be the best way to guarantee disclosure. The card should warn customers that any initial deposit will actually have a lower net value. Hopefully, this clear warning will help assure that consumers are not tricked into allowing big banks and credit card companies to take their hard-earned money.  

Assisted by: Zach Kady 

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