Here's what will happen to your Sears warranty if the company goes bankrupt (SHLD)

Hayley Peterson
Sears

AP

Albert Barrera of Odessa, Texas, walked into a Sears store recently with a pressing question for the manager: "If Sears closes, who will service my refrigerator?"

Barrera had bought a Kenmore refrigerator for $529 several months earlier, and along with it, he purchased a three-year service warranty that cost $229 — almost half as much as the refrigerator.

Now he's worried that Sears could go out of business and that his warranty will be canceled as a result. He says the store manager failed to alleviate his fears.

"He had no answer for me and assured me he had not heard of them shutting down at all, which I highly doubt," Barrera told Business Insider.

Barrera is in the same boat as countless other customers.

Sears has long been a top seller of home appliances in the US, and with those appliances, the retailer has sold countless warranties. 

But within the last decade, Sears' sales have plunged and now speculation is growing that the company could go bankrupt.

That has left many customers like Barrera wondering: what will happen to my Sears warranty?

Sears says it will honor its warranties. 

"We are a leader in the service contracts industry and proudly stand behind our product," a Sears spokesman said. "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."

But according to bankruptcy lawyer Corali Lopez-Castro, there's a possibility warranties would be dissolved in the event of a Sears bankruptcy.

"The warranties are going to be a huge issue," Lopez-Castro, a partner at the Florida-based law firm Kozyak Tropin & Throckmorton, told Business Insider. "There's a real risk that they will not be honored."

sears shopper

Jim Young/ReutersShe said gift cards and rewards points earned through Sears' Shop Your Way loyalty program could also be erased.

"I would advise customers to redeem their points now," she said. 

If Sears filed for bankruptcy protection, the fate of its warranties and rewards points would be decided in court.

Sears would have a lot of creditors to pay — including its suppliers — before customers and their outstanding warranties and loyalty points would be considered, she said.

Filing for bankruptcy protection allows companies to reorganize by restructuring their debts or selling assets to try and stay in operation.

When the sporting goods retailer Sports Authority filed for bankruptcy last year, the company petitioned a judge to allow it to honor its gift cards and loyalty points throughout the restructuring process.

Eventually, the company went out of business and the value of unused gift cards was lost.

Sears

Business Insider/Hayley PetersonLopez-Castro believes a similar fate awaits Sears if it files for bankruptcy because the underlying retail business is ailing. 

The company's sales have fallen nearly 40% in the last five years.

"It's not just about deleveraging their balance sheet," she said. "You have to actually deal with the operations, which is a much bigger problem."

Sears raised fears about a possible bankruptcy this week after it said in a filing that there's "substantial doubt" about its ability to stay in business.

The company's chief financial officer, Jason Hollar, later tried to reassure investors in a blog post saying the company remains focused on meeting its financial obligations.

"We are a viable business that can meet its financial and other obligations for the foreseeable future," he said.

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