Consider this frustrating scenario: A business closes abruptly. You paid in advance for its services, but you haven’t been able to reach the company to ask for a refund.
It’s a familiar experience for some Chicago residents. Two local businesses — Logan Square Fitness and Language Stars, which offered foreign language classes for kids — shut down with little-to-no warning last month, leaving some customers who had prepaid thousands of dollars without classes or workout time.
Customers may feel helpless when a service business shutters unexpectedly, and the process of recouping money can involve a frustrating and lengthy legal fight.
So what do you do if this happens to you?
Call your credit card company
If you paid for a class or made any other sort of advance payment with a credit card, phoning the credit card company should be first on your to-do list. That’s because credit card companies will pursue a claim — or legal action, if it reaches that point — on your behalf. Not all banks will do the same, so those who make similar payments on their debit card may not have the same protection.
“If you paid with a credit card, you have a little something extra in your back pocket,” said Greg McBride, chief financial analyst at Bankrate.com.
In some cases, customers don’t even have to pick up the phone. Some credit card charges can be disputed online.
For services that you paid for by credit card that weren’t performed, like the remaining six months in your yearlong gym contract, you should be able to get your money back, McBride said.
In fact, Cassandra Burke Robertson, a law professor at Case Western Reserve University, said paying with a credit card is the single most important way for a consumer to prevent a huge financial headache when a business they patronize closes.
A credit card company will often refund money from a disputed charge while it investigates, which means the card issuer would become a creditor if that business was headed toward, or in, bankruptcy. This is a far easier scenario because consumers aren’t left fighting for their money.
“For the consumer, this may happen once or twice in a lifetime, (but credit card companies) deal with this every day,” she said.
Small claims court is an option
If you paid in advance with a debit card or check, it can be far more complicated to get your money back, and the outcome can depend largely on your bank, Robertson said.
“There are very few remedies (to recoup lost funds) outside of a credit card company,” she said.
If your bank won’t offer you a refund, you have the option of taking a case to small claims court, where Robertson notes “you’ll probably win.”
The trouble is, if the business failed because it didn’t have enough money to pay its debts, it may be difficult to collect any money the court awards you. If a company is insolvent, which means its debts are larger than its assets, or if it has filed for bankruptcy protection, it’s illegal for that business to favor one creditor over another, Robertson said. That means, for example, that a school can’t pay parents back for lost tuition before it pays ComEd for the overdue electricity bill.
Even if that fight for payment is eventually successful, Robertson said a consumer will likely wind up with “pennies on the dollar, if you’re lucky.”
Turn off any automatic payments
While many people may assume that automatic payments — like that monthly deduction of gym dues from your bank account — will stop after a business closes, that’s not always the case. Sometimes the activity between accounts will continue, so it’s important that you turn off any automatic payments to the business as soon as possible.
“You don’t want them taking more of your money,” McBride said.
Other avenues
There are additional ways to pursue a claim while alerting others about a failed business, but they take time and don’t always produce results.
A number of parents of former Language Stars students say they’ve attempted to take action beyond disputing the charges through their credit card companies. Five parents filed complaints with Illinois Attorney General Lisa Madigan, according to a spokeswoman Eileen Boyce.
Boyce said the attorney general’s office will investigate. The office has not received complaints from former members of Logan Square Fitness, she said.
Language Stars — which had multiple locations in the city and suburbs as well as the Washington, D.C., metro area — abruptly closed in February after sending an email to parents saying it could no longer service its debts and had “exhausted all sources of funding.” It has not yet filed for bankruptcy protection.
Logan Square Fitness was evicted by a sheriff’s order after its landlord claimed the gym owed more than $216,000 in rent.
Representatives from both companies have not returned multiple calls seeking comment.
sbomkamp@chicagotribune.com
Twitter @SamWillTravel
