Delivering the Goods: What Happens When a Consumer Puts Up a Deposit for Goods and the Retailer Goes Belly Up?

Last September, Gediman’s Appliances of Bath Maine close abruptly. Customers who had put deposits down on appliances were left with neither their money or what they ordered. Sadly, this is not an uncommon occurrence when a retailer, big or small, closes. What then is a customer to do? Unfortunately, not much.

Leaving bankruptcy aside for a moment, the customer can sue the retailer and obtain a judgment but likely this is an empty gesture. Retailers that close their doors usually do so for a lack of assets, more specifically cash. It is therefore unlikely that the customer will recover anything by way of a lawsuit. Customers who paid their deposits by credit card fare better as their deposits may have some protection under the Fair Credit Billing Act. This Act allows customers to dispute the credit card charges on the basis of non-delivery of goods and have the charges reversed, assuming, of course, the consumer knows about their rights and timely disputes the charges. Finally, there is a small chance that a retailer may be able to pay customers back after holding a liquidation sale but I would not hold my breath; liquidation sales are trying to generate quick cash and so assets are sold for much less than they are worth.

If the retailer files for bankruptcy, the customers’ situations are only improved slightly. Under the Bankruptcy Code, Section 507(a)(7) allows an individual customer, who put a deposit down with a retailer to purchase goods, to receive a priority of payment over certain other creditors for up to $1,800. Practically speaking (and to avoid a long discussion of bankruptcy law) what this statute means is that customers with deposits move up the food chain. When a business is liquidated in bankruptcy, its assets are liquidated and the proceeds used to pay creditors. Secured creditors (meaning the creditor has a lien on the debtor’s property) come first, usually banks and finance companies then comes the priority creditors and finally general unsecured creditors. From experience, by the time the secured creditors are paid there is not much left over for anyone else. I am not saying that a customer will not recover anything but it likely will not be the full amount of the deposit.

Returning to Gediman’s Appliances, the attorney for the business has said that it has no intention of filing bankruptcy for the business. Instead an auction is being held to sell all of the business’ assets in the hopes of generating money to pay creditors, including customers with deposits. So until then customers have to hold tight and hope for the best. I guess the best lesson to learn here is that if you are considering putting down a deposit on goods your best bet is to use your credit card, even if you incur some interest charges. This is probably the best means to protect your purchase otherwise you may have to wait a long time to receive a pittance or nothing at all.

Here is a link to the Bangor Daily News article:

Excerpt from Title 11 Section 507(a):

“Seventh, allowed unsecured claims of individuals, to the extent of $1,800 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.”

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