Sears warranties could be worthless if company files bankruptcy: Money Matters

By Teresa Dixon Murray

Q: Now that Sears seems to be warning it could file bankruptcy, I’m wondering what could happen to my extended warranties on the appliances I’ve bought from Sears? I bought a new refrigerator, stove and dishwasher last year and also purchased extended warranties. If Sears goes out of business, who would honor those warranties?

S.S., Westlake

A: It is a bit unsettling that so many retailers that have existed for generations are having serious financial problems today. It’s no shock that Sears, which also owns Kmart and has been closing chunks of stores for years, announced it’s closing more stores this year.

But the sucker-punch last week was Sears’ warning that its end could be near. “Our historical operating results indicate substantial doubt exists related to the company’s ability to continue as a going concern,” the company said in a statement, adding it hopes to “unlock value” from a range of assets, and that could mitigate the problems.

It needs to cut costs, borrow money and raise money by selling assets. Sears said if this current path continues — its debt has increased from $3 billion to $4 billion — then the company’s future is bleak. It lost $2 billion in the most recent fiscal year and it hasn’t been profitable since 2010. Sears was once the nation’s largest retailer.

While it sold its Craftsman brand of tools in January to Black & Decker, it can’t sell everything because it will need some assets to cover pension plans. But Sears may yet sell its Kenmore appliance brand and Diehard automotive brand.

Miami bankruptcy expert Corali Lopez-Castro said it’s not a good time to be holding a warranty bought through Sears.

“The warranties could be a very big problem,” said Lopez-Castro, an attorney with KozyakTropin& Throckmorton, who specializes in bankruptcy, creditors’ rights and commercial litigation matters.

Sears is pushing back on that.

If Sears does file for bankruptcy, it may sell its appliance division to a third party,  Lopez-Castro said. The key would be whether the third party would honor the warranties.

There’s reason to think the new buyer would indeed honor the warranties as a goodwill gesture and to hold on to customer loyalty, she said. But the buyer wouldn’t necessarily be forced to honor the warranties.

If the third party didn’t want to honor the warranties, those would become unsecured claims that would take a place in line behind suppliers and other creditors.

“We are a leader in the service contracts industry and proudly stand behind our product,” Howard Riefs, director of corporate communications, said in a statement. “Sears, as well as any other company that legally sells service contracts, is required to meet regulatory requirements designed to provide adequate resources to fulfill service contracts into the future. We will fulfill our commitment to our customers and members.”

On a another issue, Sears’ rewards through its Shop Your Way program, Lopez-Castro urged consumers to use their points as soon as possible. “You should redeem them sooner rather than later. You may not be able to later,” she said. “We just don’t know how long the runway is for Sears.”

I’d urge the same warning about gift cards. Use ’em soon. Who knows what happens to Sears gift cards if the company goes under.

How far has Sears fallen? A decade ago, Sears had 3,400 stores in the United States. Now, it has 1,400. In 2006, it had 355,000 employees. Now, it has 140,000. The latest round of store closings nationwide including locations at Richmond Mall in Richmond Heights and Chapel Hill Mall in Akron.

Sears, of course, isn’t the only retailer that’s hurting. Macy’s and J.C. Penney have been closing stores for years. Others announcing closings this year: The Limited, CVS, H.H. Gregg, Abercrombie & Fitch, Radio Shack, Payless Shoes and Office Depot.

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