Gift Card Guide: How They Actually Work, Expiration Rules, & Common Scams
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Bed Bath & Beyond filed for Chapter 11 bankruptcy on April 23, 2023. Its physical store gift cards stopped working just fifteen days later, on May 8. Anyone holding a balance who didn’t spend it in that narrow window lost it outright, and the company that eventually took over the name never agreed to honor the old cards at all.
A gift card feels like cash sitting in a drawer. Legally and financially, it’s closer to an unsecured loan you’ve made to a retailer, one that can vanish the moment that retailer runs into real trouble, and one scammers have learned is easier to cash out than almost any other payment method.
Here’s how gift cards actually work behind the register, what the law does and doesn’t protect you from, and when giving or accepting one is a genuinely bad idea rather than just an impersonal gift.
- US shoppers plan to spend $29.3 billion on gift cards this holiday season, an average of $49.43 per card across three to four cards each, according to the National Retail Federation’s 2025 holiday survey.
- Federal law only guarantees a gift card stays valid for five years after activation. Ten states, including California, ban expiration entirely, while Massachusetts requires a seven year minimum instead of the federal floor.
- Consumers reported losing $212 million to gift card scams in 2024, per FTC data, with Target cards alone accounting for $35 million and a median loss of $2,500, the highest of any brand scammers favor.
- When a retailer goes bankrupt, gift cards are rarely protected. Bed Bath & Beyond’s physical cards stopped working just fifteen days after its April 2023 Chapter 11 filing, with no guaranteed path to a refund.
- Starbucks alone was sitting on $1.87 billion in unredeemed gift card balances at the end of fiscal 2024, and recognized $207.6 million of that as pure revenue through breakage, money loaded onto a card that’s never spent.
- Digital gift cards passed physical cards in 2024 and now make up 57% of sales, redeemed faster and at a higher rate than plastic, though neither format is any safer from a scam once someone else has the code.
National Retail Federation 2025 holiday survey, FTC 2024 fraud data, Starbucks FY2024 10-K. Checked September 2026.
How a Gift Card Actually Works Behind the Register
When you buy a gift card, the retailer books your cash as a liability, not revenue. It owes you merchandise equal to the balance, so the sale itself doesn’t count as income until the card is actually redeemed.
Some of that balance never gets redeemed at all. Accountants call the unused portion breakage, and once a retailer can reasonably estimate how much of its outstanding balance will realistically never be spent, it’s allowed to recognize that portion as revenue, effectively a card that was never used becomes pure profit.
Starbucks is the clearest public example, because gift and stored value cards make up an unusually large share of how customers pay. The company held $1.87 billion in unredeemed stored value balances at the close of fiscal 2024, and its own SEC filings show it recognized $207.6 million of that as breakage revenue that year alone, money customers loaded onto a card and then simply never spent.
That’s not unique to Starbucks, and it’s not fraud, it’s disclosed accounting every public retailer selling gift cards follows. It does mean the retailer has a real financial incentive to sell you a card in the first place, well beyond just making a sale today.
What Happens to a Gift Card When the Retailer Goes Bankrupt
A gift card is an unsecured claim against the company that issued it, exactly the same legal category as an ordinary vendor owed money. In a Chapter 11 filing, unsecured creditors are paid last, after secured lenders and other higher priority claims, if there’s anything left to pay them at all.
Bed Bath & Beyond is the clearest recent case. It filed for Chapter 11 on April 23, 2023, and its physical store gift cards stopped being accepted just fifteen days later, on May 8. When Overstock later bought the brand and relaunched it as the new Bed Bath & Beyond, it did not agree to honor balances from before the bankruptcy.
Toys R Us went through a similar collapse in 2018. A handful of other retailers briefly accepted its gift cards out of goodwill immediately after the announcement, but that arrangement was temporary and limited, not a legal obligation, and it ended once those retailers’ own promotional windows closed.
Spend the balance immediately
Don’t wait once a retailer announces a bankruptcy filing. Redemption windows have closed in as little as two weeks in real cases, and there’s no advance warning of the exact cutoff date.
Check whether a successor company is honoring old cards
Some acquirers assume gift card liabilities as part of buying a brand out of bankruptcy. Most don’t, and there’s rarely a public announcement either way until well after the fact.
File a claim with the bankruptcy court if you missed the window
Unsecured creditors, gift card holders included, can file a claim through the court appointed claims administrator. It’s the only formal path left, and it carries no guarantee of any payment.
Treat a struggling retailer’s card as a loss, not savings
Store closures, missed earnings reports, and credit downgrades are all public warning signs. Once they show up for a retailer you’re holding a balance with, spend it rather than continuing to treat it as money in the bank.
Expiration and Fee Rules Depend Entirely on Which State You’re In
The federal CARD Act of 2009 set a floor, not a fixed rule. A gift card can’t expire within five years of activation, and no dormancy or inactivity fee can be charged until the card has sat unused for at least twelve months, with any such fee clearly disclosed on the card itself.
States are free to require more, and several do. Ten states currently ban expiration on store issued gift cards outright, and one requires a longer minimum than the federal floor rather than eliminating expiration entirely.
| Jurisdiction | Expiration rule | Dormancy fee rule |
|---|---|---|
| Federal (CARD Act) | Cannot expire within 5 years of activation | None until 12 months of inactivity, must be disclosed |
| California, Connecticut, Florida, Maine, Minnesota, New Jersey, Oregon, Rhode Island, Vermont, Washington | No expiration date permitted, narrow exceptions for promotional or donated cards | Varies by state, several restrict fees further than federal law |
| Massachusetts | Cannot expire within 7 years of activation | Same 12 month floor as federal law |
| Every other state | Federal 5 year floor applies | Federal 12 month floor applies |
Federal CARD Act 2009 and current state statutes, checked September 2026. Promotional and reward cards, as opposed to store issued gift cards, often carry different rules.
Digital Has Quietly Overtaken Physical
Digital gift cards passed physical cards in total sales share in 2024, and the gap has kept widening since. The two formats aren’t growing anywhere close to the same rate.
Share of total gift card sales by format, industry data, 2024 to 2026. Digital crossed the 50% mark in 2024.
The growth rates behind that split are the real story. Digital gift card sales are expanding at roughly 23% a year, while physical card sales are growing closer to 4%, barely ahead of general retail inflation.
Annual sales growth rate by gift card format, industry data, checked September 2026.
Digital cards also get used more reliably once someone actually has one. Redemption rates run around 91% for digital cards against 82% for physical ones, and a digital balance typically gets spent about 2.3 times faster than a physical card sitting in a wallet or drawer.
Redemption rate by gift card format, industry data, checked September 2026.
None of that makes a digital card safer once someone else gets hold of the code. A screenshot of a digital gift card and a photo of a physical one work identically well for a scammer, format has nothing to do with fraud risk, only who’s asking for the code and why.
Retailers have their own reasons for pushing digital besides what shoppers prefer. A plastic card costs money to print, package, ship to a store, and stock on a rack, none of which applies to a code delivered by email. Digital delivery also skips the card draining risk entirely, since there’s no physical rack for a thief to tamper with in the first place.
The Scam That Happens Before You Even Buy the Card
Card draining doesn’t need a phone call or a fake tech support pop up. It starts on the rack inside the store, before anyone has bought anything at all.
Organized groups quietly open the packaging on unactivated cards displayed for sale, record the card number and PIN hidden underneath, then reseal the packaging carefully enough that it looks untouched. Bots then watch that card number around the clock. The moment an unsuspecting shopper buys the card and a cashier activates it at the register, the balance gets drained automatically, often within minutes.
The scale of it drew federal attention. Authorities estimate Americans lost more than $1 billion to card draining specifically over roughly two years, a figure tied to a Department of Homeland Security enforcement initiative that began under the Biden administration, and the problem was serious enough to prompt US Senate hearings in April 2024. That’s a narrower number than gift card fraud overall, which runs past $5 billion a year once every scam type, not just draining, gets counted together.
Maryland became the first state to legislate against it directly. Its Gift Card Scams Prevention Act of 2024, signed that May, requires secure tamper evident packaging, in store warning signage, and employee training on spotting drained cards, with the rules phased in through October 2025 for most gift card types sold in the state.
The Scam That Costs Victims More Than Almost Any Other Payment Method
Gift cards are a scammer’s preferred payment method for one simple reason: once the code on the back is read aloud or photographed, the money is gone, with none of the reversal protections a credit card chargeback or even a bank wire sometimes offers.
The FTC received more than 41,000 fraud reports in 2024 naming gift or prepaid cards as the payment method, totaling $212 million in reported losses. Target branded cards were the single most common choice, accounting for about $35 million of that total on their own, more than twice any other brand.
The median loss on a Target card specifically was $2,500, higher than any other brand, and nearly a third of victims who used Target cards reported losing $5,000 or more in a single incident. Google Play, Apple, eBay, and Walmart cards rounded out the next most common choices among scammers.
The trend line matters as much as any single year’s total. The median amount a victim loses has climbed from $700 in 2018 to $1,000 more recently, and both the number of reports and total dollars lost have risen almost every year since gift cards first became a preferred scam payment method.
The script rarely changes even as the numbers grow. A caller claims to be the IRS, a utility company threatening a shutoff, a tech support agent who’s found a virus, or even a grandchild in trouble, then insists the only way to resolve it right now is a gift card, read aloud over the phone before you’ve had time to check the claim with anyone else.
When a Gift Card Is Actually a Good Idea, and When It Isn’t
Put the accounting, the state law patchwork, and the fraud numbers together and a gift card stops being a neutral, impersonal gift. It’s a specific financial product with real tradeoffs depending on who’s giving it, who’s receiving it, and where.
A card for a store someone already visits gets used quickly, closing the window for both breakage and a bankruptcy surprise to matter.
California and nine other states remove the clock entirely for store issued cards, so a balance genuinely can sit unused without a deadline attached.
A digital card arrives instantly, gets redeemed faster on average than plastic, and skips the small but real risk of a physical card being lost or stolen in transit.
A request to settle a bill, fine, debt, or fee using a gift card code is never legitimate, no matter who’s asking or how the request is framed.
The weaker cases are just as specific. A card for a financially struggling retailer, a large balance meant to sit unused for years, or one bought to avoid a harder gift decision all carry real, measurable risk the sections above already quantify, breakage, bankruptcy exposure, and a slow moving expiration clock that a cash gift or a store credit card simply doesn’t share.
A card for the wrong store also costs real money to correct after the fact. Resale marketplaces like CardCash pay anywhere from about 70% to 92% of face value depending on the brand, and the exact rate can swing sharply even between two well known retailers. CardCash’s own site has quoted a $100 Apple card at $77.50 while a $100 Microsoft card fetched only $60, an immediate loss of anywhere from 8% to 40% before a recipient sees a cent.
That math is a real argument for picking a widely usable card, a general purpose Visa or Mastercard gift card, or one for a large retailer selling almost everything, over a narrow, single purpose store card for someone whose habits you’re not fully sure of. A card that never has to be resold at a discount is worth its full face value by definition.
The occasions where gift cards get given most, covered in our Mother’s Day and Father’s Day gift guide, are exactly where these tradeoffs show up most often. The same logic applies whether the occasion is Christmas or Valentine’s Day, pick a retailer the recipient already uses, check the state’s expiration rule if the balance might sit for a while, and never treat the card itself as a way to send or receive a payment outside a normal purchase.
Current gift card offers and discounted card deals change constantly, which is exactly the kind of detail that goes stale fast in an article like this one. They’re tracked separately and kept current on CouponZania’s Gift Cards category page, alongside the same kind of usage data covered in our broader coupon statistics roundup.
Frequently Asked Questions
Do gift cards expire?
Under the federal CARD Act, a gift card cannot expire within five years of activation. Ten states, including California, ban expiration entirely for store issued cards, and Massachusetts requires a seven year minimum instead of the federal five year floor.
What happens to a gift card if the store goes bankrupt?
It usually becomes an unsecured claim with no guaranteed payout, the same category as any other vendor the company owes money. Bed Bath & Beyond’s physical gift cards stopped working just fifteen days after its April 2023 Chapter 11 filing, and the relaunched brand never agreed to honor old balances.
How much money do people lose to gift card scams?
The FTC recorded $212 million in reported losses in 2024 across more than 41,000 reports naming gift or prepaid cards as the payment method. Target branded cards alone accounted for about $35 million of that, with a median loss of $2,500 per victim.
Are digital gift cards safer than physical ones?
Not from fraud specifically, a stolen code works the same way regardless of format. Digital cards do get redeemed faster and at a higher rate, 91% versus 82% for physical cards, mostly because there’s no risk of losing a physical card before it gets used.
What is gift card breakage?
Breakage is the portion of a gift card’s value that’s never redeemed, which retailers are allowed to recognize as revenue once they can reasonably estimate it. Starbucks alone held $1.87 billion in unredeemed balances at the end of fiscal 2024 and recognized $207.6 million of that as breakage revenue that year.
Can a legitimate business or government agency ever ask me to pay with a gift card?
No. No real government agency, utility company, court, or law enforcement officer will ever ask for a bill, fine, or fee to be paid with a gift card code. A request framed that way is a scam every time, regardless of how official or urgent it sounds.
