Remember that $100 gift card you are still holding on to? What if you find out tomorrow that the gift card issuer is going out of business? What would happen to your card? Would you still be able to redeem it?

Consumers holding gift cards issued by The Sharper Image were given a rude awakening when the company suspended the redemption of gift cards and certificates after it filed for Chapter 11 bankruptcy protection last week. According to a story by the Consumerist blog, some gift card holders were having trouble redeeming their gift cards online and when they called customer service, they were informed of the suspension.

A similar situation happened when The Bombay Company filed for Chapter 11 in September, 2007. The company was ordered by the bankruptcy court to suspend the redemption of gift cards and certificates.

So, what can you do in this situation? Your options are not very promising. One thing is certain; you are probably not going to get all your money back. You will even be lucky to get something back. This is because among the list of the company’s creditors, gift card holders are unsecured creditors and according to the way the bankruptcy process works, unsecured creditors are very low in priority when it comes to the order by which creditors are paid.

The company will probably issue instructions to gift card and certificate holders to file a claim against the company’s bankruptcy estate. This may take several months, if not a year to sort itself out. But all is not lost. Companies that file for Chapter 11 plan to reorganize and stay in business and one would hope that the last people they would want to treat badly are their existing customers.

One interesting and confusing fact is that some states (e.g. MN, CA and WA) have laws that require gift card issuers to continue to accept gift cards that were issued before the bankruptcy was filed. But it appears that with both The Bombay Company and The Sharper Image, federal law took precedence. Consult your state’s attorney general’s office to get clarification on this.

So, what can you learn from this experience? Keep your eyes and ears wide open when purchasing a gift card. Avoid purchasing a gift card from a company struggling to stay in business. However, do not drive yourself crazy in the process. While what happened to customers of The Sharper Image is unfortunate, it should be noted that bankruptcy is more the exception than the norm.

Do you currently hold a Sharper Image or Bombay Company Gift Card? We would like to hear from you. Share your story with us below.