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When Your Couch Is on Order and the Company Goes Bankrupt

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By Elizabeth Razzi
Sunday, September 21, 2008

Maybe they'll become collector's items, my coffee table from Bombay Co., some old bedside tables from Scan. Both are retailers that have shuttered their stores after filing for bankruptcy protection. It's the trickle-down result of a poor housing market.

It's not just big home-building companies that are struggling. Bankruptcy filings are increasing among small contractors, designers and furniture stores -- the folks you deal with when you need an upgraded bathroom or new sofa.

If you paid a deposit to a company that heads to bankruptcy court (especially Chapter 7, when the company goes out of business and the court distributes whatever assets it has left) you'll find yourself one of many "unsecured creditors" vying for scraps.

"Consumers are first in line to get nothing," said Eric Friedman, director of Montgomery County's consumer protection office.

During the first half of the year, the number of Chapter 7 liquidations nationally soared nearly 55 percent higher than the year before. Chapter 11 filings, in which the company tries to stay in business, were up 30 percent, according to the American Bankruptcy Institute.

Locally, housing-related businesses are well represented on the bankruptcy rolls. Those being liquidated through a Chapter 7 filing so far this year include Adrian Edwards Custom Homes, Reston; Catoctin Custom Builders, Purcellville; Dominion Furniture, Manassas; Eagle Crest Homes, Manassas; Furniture Oasis, Woodbridge; Hoff Remodeling, Gaithersburg; Market Home Furnishings, Oakton; Pavers Plus, Frederick; Prestige Builders, Potomac; Randy's Paint and Decorating Center, Hagerstown; Timberline Design & Build, Annapolis; and W to W Bath Designs, Kensington.

Unfortunately, you often can't tell if a company is on the brink. Whenever possible, protect yourself by using a credit card to pay deposits. And don't rush to pay off that card balance, especially if you're buying furniture that won't be delivered for six to 10 weeks.

If the company fails to deliver your goods, you may be eligible for a "chargeback" of the deposit amount. That happens when the bank whose name is on your credit card charges the disputed bill back to the merchant's bank. The charge, along with associated interest, is removed from your bill. To qualify, you'll have to prove to the credit card company that you made a good-faith attempt to resolve the issue with the merchant. You can protect your ability to request a chargeback by carrying that balance on your account until you have received the goods.

"If you pay off the balance to zero, that will extinguish your chargeback rights," Friedman said.

Federal regulations offer important consumer protections to borrowers who have not received goods for which they have been charged. At a minimum, the Fair Credit Billing Act entitles you to contest charges (by certified letter to the "billing inquiry" address on your statement) within 60 days after the card company first mailed the bill. Chargeback arguments have a longer time frame.

Some major card issuers told me they try to accommodate card holders who get wrapped up in a merchant's bankruptcy.

A spokesman for Citi Cards, which issues Visa and MasterCards, said if consumers provided detailed proof of their attempts to work out a resolution with the vendor, they may process a chargeback up to 120 days from the date the goods were supposed to be delivered. He said a consumer might still get a refund of the deposit even if he had already paid off the card's balance.

Certainly an individual bank can follow more-lenient policies with its own credit card accounts in an effort to maintain their brand's image and consumer goodwill. In general, though, you'll better protect your rights by keeping that charge on your bill until the goods arrive at your doorstep.

"In the case of a bankruptcy specifically, we undergo a review process of the situation before making a determination on how to help a cardmember," said Mona Hamouly, an American Express spokeswoman. "While each bankruptcy is handled on a case-by-case basis, the benefit for the cardmember is that they are not alone in the dispute process, as may be the case if the deposit were made in cash or some other form of payment."

Document every step of your transaction. Always keep original contracts and receipts, of course. Send written requests for a deposit refund to the company (or to the entity appointed by the bankruptcy court) by registered mail, return-receipt requested. You will need copies of this paperwork to justify your claim with the credit card company.

Another way to protect yourself during a touchy economy is to do business with companies that can deliver quickly. For example, some catalogue-based companies promise delivery of in-stock furniture within a week. You'll get your sofa before the credit card bill even arrives.

Dealing with home-improvement companies can be more perilous, if only because the transactions usually involve bigger dollar amounts. Most home-repair and home-improvement contractors don't accept credit cards, and they often ask for one-third of the job's estimated cost, plus extra for materials that have to be custom-ordered. (Maryland law limits the deposit to one-third at the time of contract, but a customer could still be asked to pay more shortly thereafter.)

It's risky to hand your check to a contractor who's facing financial trouble because struggling contractors often use deposits from new clients to pay off bills from previous jobs. The cash could be gone before the contractor ever gets to your job. It's bad business practice but all too common among contractors on death row.

Try to negotiate deposits as low as possible, say down to 20 percent. Then make subsequent payments as work reaches specific benchmarks, such as completion of framing or installation of appliances.

For custom-ordered materials that require prepayment, see if you can arrange to pay the supplier directly. Pay those suppliers by credit card whenever possible. (Work through the contractor to be sure you still get any discount available to him. If he's expecting to mark up those materials, cover the markup. You're not trying to cut the contractor out of a fair profit.)

Finally, it doesn't hurt to keep an eye on the bankruptcy notices published on Mondays in The Post's Business section. Check out who has filed for protection and the names of their unsecured creditors, along with the amount they're owed. If a company you're doing business with is listed as an unsecured creditor for another company that just filed for bankruptcy, the dominoes could be falling toward you.

E-mail Elizabeth Razzi atrazzie@washpost.com.

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