First came credit cards in the 1970s, then debit cards in the 1990s, and now there are what the financial industry refers to as “stored-value cards”: cards that function independently of a line of credit or a demand account. The cards’ balances are pre-funded, much like secured credit cards, which I wrote about here. Stored-value cards exist in several forms. One is simply a prepaid card that the cardholder purchases, which can work with any retailer or just one (gift cards). Another kind, which is becoming more common are “payroll cards”—cards supplied by employers to employees to transfer wages instead of traditional paychecks and bank accounts.
Needless to say, these cards have some benefits and drawbacks, and they can play a role in a New York bankruptcy. First the pros:
- The greatest advantage is convenience: Stored-value cards are essentially a substitute for paper currency at any denomination, but more importantly, they cannot create large debts as credit cards do, nor can they be overdrawn as debit cards can. Using up a stored-value card is more like using up one’s cash than depleting a debit card.
- More importantly, stored-value cards offer a different kind of convenience: freedom from banks. Many Americans are “underbanked,” meaning they lack access to banking services that better-off Americans take for granted. This means that businesses can employ workers who are ineligible for direct deposit options because they lack bank accounts, and these workers don’t need to stand in line cashing checks—or worry about carrying around large amounts of cash.
- In bankruptcy, stored-value cards can receive more favorable treatment than simple cash. For instance, gift cards, discussed here, don’t really count as assets in a bankruptcy case because the value can only be redeemed with one merchant. It’s not something trustees like to go after as they usually aren’t worth much to them or creditors. For more general stored-value cards, the question of where the money is becomes murkier as it depends on the identity of the issuer. Otherwise, it’s possible that stored-value cards reduce the likelihood of filing bankruptcy as compared to credit cards, since no debt is created.
Now for the cons:
- To begin with, stored-value cards frequently charge their users high fees. For example, in 2013, The New York Times reported that one payroll card issuer charged users $1.75 for each ATM withdrawal and even a $7.00 “inactivity fee” for when the cardholder had not used the card for too long. Sometimes workers are automatically enrolled in payroll card systems and must jump through substantial hoops to opt out. It’s one of the many ways that underbanked Americans pay more than banked Americans.
- Stored-value cards are under-regulated. Aside from fees, stored-value card issuers are not subject to similar federal regulations that cover credit cards. Card issuers are not required to offer cardholders a clear schedule of fees associated with the cards they sell, and they don’t necessarily provide contact information either.
- If the card issuer files bankruptcy, cardholders could lose everything. There’s no deposit insurance for stored-value cards, so if they disappear, their holders lose everything on their cards. By contrast, the Treasury Department, which creates currency, can’t go bankrupt.
Stored-value cards are a feature of consumer life that is here to stay, the only problem is strengthening consumer protections. Relying on them instead of credit cards might keep people out of bankruptcy, but if you do run into trouble with any kind of card, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.
