Updated on April 23, 2008.

AMONG THE LATEST victims of the economic slowdown: high-tech gadget shop Sharper Image and catalog company Lillian Vernon. Both big-name retailers filed for Chapter 11 bankruptcy protection in February after struggling with anemic sales and a weak holiday shopping season.

These retailers are part of a growing trend in the retail industry: In September, furniture retailer Bombay Company filed for Chapter 11 bankruptcy protection. Three months later, electronics retailer CompUSA announced it was being acquired by an investment firm that would start closing its retail operations and sell some of its assets. And there's likely more retail bloodletting to come. The International Council of Shopping Centers projects that as many as 5,770 stores could close this year, the highest number of closings since 2004. Next on the list may be struggling home-furnishings chain Linens 'n Things, which, burned by the housing slump, is hovering near bankruptcy. (Private-equity firm Apollo Management bought out the Clifton, N.J.-based retailer in 2006.)

For consumers, these closures are a mixed blessing: While they may be losing a favorite shopping destination, they can also stock up on some great deals at their going-out-of-business sale. Being able to finally afford that full body massaging recliner from Sharper Image is enough to make any bargain hunter salivate. But shoppers need to proceed with caution when dealing with stores in their death throes.

"'Going out of business' is a phrase that really draws people in," says Edgar Dworsky, founder of ConsumerWorld.org. "You get to use it once in a lifetime of a company, and people may presume savings are better than they really are."

Here's what to watch out for when doing business with a store that's going out of business:

Bogus bargains

With signs claiming, "All items slashed by 50%!" how could you resist? Going-out-of-business sales are understandably enticing. But shoppers should be extra careful when wading through a sea of extreme markdowns particularly when a liquidator has taken over the store and is trying to sell off the retailer's leftover products. Oftentimes, they bring in outside goods and additional inventory to supplement the retailer's own stock, says Dworsky.

"Those things never really had a regular price at that store. So to say you're getting 50% off a price they never charged is a deceptive practice," he says. And it's illegal in some states, but that doesn't stop some companies from doing it.

To make sure that the store isn't the one that's really getting the deal, go online and do some comparison pricing before you buy anything in the store. Also, check the price tags of various items in the store and see if the color, typeface and format are similar. If there's a lack of uniformity on the tags, you're probably dealing with some extra inventory brought in by the liquidator, says Dworsky.

Points of no returns (or repairs)

In most cases, all sales are final. If you buy something that turns out to be defective or damaged, you're going to have a tough time getting a bankrupt store to repair the product or give you a refund (that is, unless you live in a state that legally requires the seller to do so).

To protect yourself, make sure the item you purchase comes with a manufacturer's warranty, says Dworsky, and pay with a credit card. As long as your product is still covered by the manufacturer's warranty you can probably get it replaced or repaired by them. If you'd prefer to get your money back and the store refuses a refund, you can try to charge back the purchase with your credit card company. In this case, consumers write their card issuer, indicating how the product is defective and requesting that the item be taken off their bill. The card company will then contact the merchant to get their side, says Dworsky. If the card issuer agrees with your position, they will permanently take the charge off your bill.

If you spent $170 to get a one-year extended warranty on that Sony laptop computer from CompUSA, you aren't entirely out of luck. CompUSA arranged with a third-party to take over its service agreements. But that may not always be the case. And it goes without saying that you shouldn't buy any extended warranties or service agreements from a retailer in the process of going out of business. California's Department of Consumer Affairs advises consumers to look for a warranty on the product independent of the retail store.

Gift-card holders are out of luck...

When a company files for bankruptcy, all of the parties it owes money to lenders, vendors, former employees stand in line hoping to get at least

of their money back. In this queue, gift-card holders and those who have store credit bring up the rear and rarely get anything.

"In bankruptcy, there will be a pot of money that has to be distributed to those who are owed money, but it will not generally be enough to give everyone 100% of their losses," says Dworsky. "How much each person gets and in what order is what the bankruptcy court determines." According to California's Department of Consumer Affairs, if there are no assets in the bankruptcy estate for unsecured creditors like gift-card holders then they'll receive nothing.

One glimmer of hope for these consumers is if the company intends to reorganize after it declares bankruptcy, says John Rao, staff attorney at the Boston-based National Consumer Law Center. As long as the company stays in Chapter 11 bankruptcy, which means it intends to reorganize, emerge from bankruptcy and continue doing business, there's a chance consumers can redeem their credit. Keep in mind, though, that most Chapter 11 bankruptcies eventually end up in Chapter 7, which means the company plans on ceasing business operations for good.

...Especially if they don't act fast

Gift-card holders do have recourse, says Rao. Since gift cards are bought as a deposit for goods to be picked up in the future, Rao believes card holders should have priority over other unsecured creditors. To make sure card holders get what's due to them, he suggests they fill out a proof of claim form with the bankruptcy court. But consumers will have to act fast. The window to file these claims is typically within 90 days of the company's bankruptcy filing.

Forms can be found on the U.S. Bankruptcy Court's web site, the company's site or that of a third-party firm handling the restructuring. (See sidebar for tips on filing a claim.) Bombay, for example, provided instructions on how to file a claim against the company's bankruptcy estate on its site. (The deadline for claims against Bombay passed; it was March 1, 2008.) According to Sharper Image's gift-card policy on the company's web site, customers who want to redeem their cards must purchase merchandise equal to twice the value of the card. So if you have a $25 gift card, you'll need to buy something worth at least $50 in order to use it. Customers who don't want to redeem their gift cards can file a claim, but there's no guarantee of payment.

Shop defensively

Unfortunately, there's no way to know if a company is going to go out of business until it's announced. "When it's two weeks before Christmas, you're at the mall and the music is playing and the stores full, no one would think a month and half later they would go out of business," says Melissa Horne, an attorney at Providence, R.I., law firm Winograd, Shine and Zacks. As retailers continue to grapple with declining sales, it pays to think about where and how you shop.

Consumers shopping for big ticket items or gift cards can check with the Consumer Protection Division of their state's attorney general's office for news or notifications about a particular retailer that may indicate whether they're struggling or not. And if you have a gift card or store credit, it's probably best to spend it as soon as possible. "Don't throw the gift card away into an envelope," says Dworsky. "Use it as soon as you can because, whether it's a restaurant or retailer, so many companies go out of business."

Tips on filing a claim for gift cards and store credits Once you get word that a retailer is filing for bankruptcy, go to their web site and check if they're accepting claims. Like Bombay, they may even provide the form on the site. Another way to hunt down bankruptcy information is to go to the courts. A local store would probably file for bankruptcy protection in the U.S. Bankruptcy Court for your region, while many bigger retailers will file in federal court in Delaware, says Rao. A list of bankruptcy courts nationwide and links to their web sites can be found at . uscourts.gov Don't wait too long to file a claim. You usually have 90 days from the bankruptcy filing date to file. It's best to file your claim as soon as you've confirmed that claims are being accepted. You can download a standard "proof of claim" form from the forms section on the court's . web site Contact the clerk of the bankruptcy court to get the name and number of the bankruptcy case. Include copies of receipts and gift cards with the form. (Source: California Department of Consumer Affairs)