May 22 (Bloomberg) -- Some gift horses you should look in the mouth.

The growing number of retailers filing for bankruptcy as the U.S. economy teeters on the brink of a recession means consumers can't redeem gift cards as easily as they once could.

Sharper Image Corp., the bankrupt seller of $300 electric shavers and $2,000 massage chairs, wants customers to spend twice the value of their gift cards before they can redeem them. Levitz Furniture Inc. is telling holders who want to use the cards to file a claim with the bankruptcy court overseeing its liquidation. Linens 'n Things Inc., a bankrupt U.S. housewares retailer, is honoring the credit card-sized plastic cards with court approval.

``Pity the poor young bride who chooses gift cards as wedding gifts and then gets stuck,'' Brian Riley, a senior research analyst with the Needham, Massachusetts-based Tower Group research firm, said in a telephone interview. ``It does shake confidence in the concept of gift cards.''

The first wave of retail bankruptcies since the use of gift cards became widespread in the U.S. in the past seven years exposes the potential risk for holders. The average card has $120 worth of store credit and often there's no time limit on when it must be used.

``This is the first test of gift cards we have seen so far,'' Riley said. ``The current economy is causing this facet of stress to come out.''

Shoppers Scale Back

Shoppers have trimmed spending because record food and fuel prices left them with fewer dollars for less essential items. Home-furnishing chains were particularly hurt, reeling from the worst U.S. housing slump in a quarter century. Levitz, a 76- store furniture retailer, is in bankruptcy court for the third time.

Sharper Image, which filed for protection under Chapter 11 of the bankruptcy code on Feb. 20, and Linens 'n Things had a total of more than $100 million in unredeemed gift cards and certificates and other amounts due to customers, according to company filings.

A third of an estimated $30 billion in store gift cards sold in 2007 may be unused, and even 2006 cards may still be redeemable, Riley said.

Holders of gift cards at bankrupt retailers may end up empty-handed, said John Suckow, a managing director at Alvarez & Marsal in New York who advises companies on restructuring.

Lining Up

After a company files for bankruptcy protection, it must pay administrative costs relating to its reorganization, settle tax claims and reimburse creditors who have collateral.

Gift-card recipients are lower on the repayment totem pole, Suckow said.

``That's if there is money left,'' he said. ``They may get nothing.''

Linens 'n Things, the Clifton, New Jersey-based retailer owned by Apollo Management LP, still sells cards valued at as much as $200 each, and its gift-card Web page doesn't mention the bankruptcy.

``There's no reason to,'' said Susan Kenney, an outside spokeswoman for the company. ``There is no change to the gift- card program.''

Sharper Image ``is working diligently'' to be able to honor cards and certificates without condition in the future, according to the San Francisco-based company's Web site. The restrictions imposed were a compromise arrived at in bankruptcy court, Robert Conway, the founder of Conway Del Genio Gries & Co., which was hired to help sell Sharper Image, said in a May 9 interview.

Brookstone Strategy

Brookstone Inc. has sought to take advantage of Sharper Image's restrictions to win customers. Since late February, it has offered to convert Sharper Image gift cards into 25 percent savings on purchases at its stores.

In addition, holders of Sharper Image, Linens 'n Things and other unused gift cards can convert them to cash at a discount under an expanded ``QuikCash'' program at Plastic Jungle Inc., a gift-card exchange Web site.

``Concerns about gift cards no longer being valid at select retailers is a very real issue in today's uncertain economy,'' Tina Henson, Plastic Jungle's chief executive officer, said in a May 13 statement.

A retailer that plans to continue operating after reorganization is more likely to honor gift cards than one that's in liquidation, Suckow said in a May 8 interview.

``Keeping the customer business is absolutely critical,'' Suckow said. ``It is akin to all the airlines that went through bankruptcy and honored frequent flyer miles.''

Legal Protections

Linens 'n Things yesterday won court approval to sell the inventories of 120 of its 589 stores to a group of investors for at least $120.3 million. Closely held Sharper Image on May 15 won bankruptcy court permission to sell all of its assets at a May 28 auction.

Future gift-card purchasers need legal protections, perhaps through a Chapter 11 amendment, said David Sievers, head of the retail practice at Archstone Consulting LLC in Stamford, Connecticut. ``The law hasn't caught up,'' he said.

``It would give consumers confidence, and that is good for the economy,'' Sievers said.

For now, the best protection for gift-card holders, experts say, is to head to the store and spend the plastic money. About 85 percent of all gift cards are used within three months, Sievers said.

``You do not want to use the gift card as a saving device,'' Riley said. ``These are meant to be used.''

The Sharper Image case is In re Sharper Image Corp., 08- 10322, U.S. Bankruptcy Court, District of Delaware (Wilmington).

The Linens 'n Things case is In re Linens Holdings Co., 08- 10832, U.S. Bankruptcy Court, District of Delaware (Wilmington).

The Levitz Furniture case is In re PLVTZ Inc., 07-13532, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Cotten Timberlake in Washington at ctimberlake@bloomberg.net

Last Updated: May 22, 2008 14:04 EDT