Ask Laz: Fresh Produce: Will a bankrupt business honor gift cards?

A reader asks about gift cards for the clothing retailer Fresh Produce, which has filed for bankruptcy protection.

If the company goes down the Chapter 11 rabbit hole, are the gift cards still good?

I get asked this question a lot -- pretty much any time a well-known company goes bankrupt. What happens to gift cards that customers still hold?

Short answer: It depends.

Under a Chapter 11 bankruptcy filing, as Fresh Produce is pursuing, a business reorganizes its financial obligations. The intent is to stay open and to continue serving customers.

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Most of the time, such companies continue honoring gift cards. And even if they choose not to, a bankruptcy court might still rule that gift cards remain good.

A Chapter 7 bankruptcy is different. In that case, a company is going out of business and is liquidating its remaining assets to pay off creditors.

Outstanding gift cards almost always become worthless under a Chapter 7 filing. At best, cardholders might get pennies on the dollar.

Fresh produce has stores in Pasadena, Anaheim, La Jolla and Palm Desert. The company says its stores will remain open as it seeks cash from possible investors.

It also says it will keep honoring gift cards “at this time.”

My advice when confronting situations like this is to not wait around. If a company’s in distress, use any gift cards as quickly as possible.

I’m not saying the company will go away. But you never know.

If you have a consumer question, email me at [email protected] or contact me via Twitter @Davidlaz