After Synergy World, a San Diego gift and loyalty card company, announced it was shutting down and planning to file for Chapter 7 bankruptcy protection, the company told its customers they can no longer use Synergy’s gift cards.

Until a bankruptcy court filing, little will be known publicly about Synergy’s finances or the state of its gift card operation, including the balance of unredeemed cards and what caused the business to close before it honored its obligations.

The company was not reachable by telephone, and an email was not immediately answered.

The Synergy situation serves as a reminder that there is some risk in buying gift cards.

Ted Rossman, Bankrate’s principal analyst, offered a few pointers for how to use gift cards effectively and what typically happens to gift cards when a business fails.

How gift cards work in California

A gift card, Rossman said, is a promise. “It’s a liability. From a legal standpoint, a gift card is basically a contract for a future sale.”

A company gets the money up front and benefits from the cash flow, he said. However, the company cannot “book the revenue until (customers) actually redeem it. So, it’s kind of like an IOU. It’s a promise for future goods or services.”

Under the 2009 federal Credit Card Accountability Responsibility and Disclosure Act, gift cards can expire after five years. California is different: they cannot expire, and card makers cannot charge a service fee while the card is dormant, with some narrow exceptions.

Unredeemed gift cards are a big line item on company balance sheets. Starbucks’ gift card balances topped $2 billion in December, according to January report.

About Synergy

Gift cards can be sold by a merchant for its own goods or by a third party. Synergy was a third-party business, and restaurants around the U.S. participated in its program. Its cards were sold at Costco.

El Indio, Barra Barra, Havana Grill, Bencotto, Cafe Sevilla and The Godfather were among the restaurants that at some point partnered with the Synergy gift card.

For this promotion, restaurants paid a marketing fee.

In 2024, the company was on a growth path, planning to launch in three new markets after being present in 13 cities and regions.

In case of bankruptcy

When businesses fold, it’s typical for them to grant a short period for leftover balances to be used. After that deadline, they can’t be redeemed, and their customers have no recourse, Rossman said.

Costco, which sold the cards, did not reply to an interview request. Some Costco stores had been refunding the cards, according to media reports.

Rossman evoked a “graveyard of retailers past” and recalled Toys R Us, Sears, Radio Shack, and Bed Bath and Beyond. “Typically, when a store goes under, the gift card ceases to be valuable.”

After a store announces its closure and sets a deadline for when gift cards must be used, “you need to be really mindful of the deadline, because once that published deadline passes, you usually won’t get anything.”

Synergy, in a message to customers, said it had planned to process gift cards until Feb. 1, but backtracked and stopped several days sooner. “A tremendous surge in redemption rates has forced the immediate discontinuation of the program,” it wrote.

As unsecured creditors, gift card holders fall well down the line of creditors when a company goes bankrupt, Rossman said.

A post from Giftcards.com said that at times, other stores will offer promotions to gift card holders of bankrupt competitors. “When Sharper Image filed for bankruptcy and stopped accepting gift cards, Brookstone, one of their competitors, offered consumers 25% off any purchase if they surrendered a Sharper Image gift card in the process,” the post says.

Getting the most out of a gift card

Bankrate’s 2024 report found that 43% of Americans have at least one unused gift card, voucher or store credit, with higher-income households more likely to be in this situation. The average total of unused balances was around $250 per person.

Rossman shared a few pointers for getting and giving the most out of gift cards

•Aim for convenience. When you give a card, match the recipient’s interests and location, so you’re not requiring a long drive to redeem the card. Also, match the card’s value to the merchant’s prices. “Maybe it’s impractical for cost reasons,” Rossman said. “Like you get a $25 gift card to an expensive jewelry store or steakhouse. Are you saving $25 or spending several hundred dollars?”

•Keep cards on hand. “We forget about them. It’s sort of out of sight, out of mind,” he said. Stashing a card in your wallet, bag or car instead of a desk drawer is one way to improve the chances of using it.

•Sell unwanted cards. Several gift card markets trade money for cards. You won’t get the full value, but it’s better than nothing.

•Sooner, not later. The sooner you access or sell a gift card, the better. Given inflation, the buying power of that $25 or $100 card falls over time, Rossman pointed out. Plus, setting a gift card aside and forgetting about it could lead to the problem Synergy’s card holders are facing now: the store going out of business.

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