What to Do If Your Travel Agency Goes Under

You could easily have missed the brief story recently in the San Francisco Chronicle: Two former local travel agents were sentenced to prison for bilking more than a million dollars from hundreds of customers nationwide. It's a reminder that one of the travel industry's lingering headaches is still with us. And in today's economic crunch, it means you may see more agency defaults in the coming years.

The story's plotline has been around a long time. A travel agency takes in advance payments for tickets and tours, as is typical in this marketplace. But as the economy weakens and the agencies start to be pinched for cash, they begin to use payments for future trips to pay off current bills. Ultimately, of course, this process has to play out, as the agency runs out of money before covering for the trips its later customers had paid for in advance. The ultimate result is that those later customers are left with neither their trips nor their money.

When I first started in this business, the biggest such failures were among wholesale tour operators, rather than retail travel agencies. The worst cases got a lot of publicity: Hundreds of travelers lost hundreds of dollars each, and some groups were stranded overseas when the operators couldn't pay for return air travel. Those cases also provided the impetus for some remedial legislation: a federal requirement that tour operators who use charter travel deposit prepayments from travelers into escrow accounts until their clients' travel is fully paid, and a few state laws to prevent consumer loss.

Even after passage of those laws, however, a few tour operators and agencies managed to fail without fully compensating travelers. Moreover, as use of charter travel has decreased to a mere trickle, the escrow requirement has become largely irrelevant. Although the incidence of these problems dropped off significantly from the highest levels in the 1970s and 1980s, agent failure remains an occasional problem.

The current California case involves three individual agencies, and it's no surprise to me that one of them specialized in religious travel for a largely senior market, the other two in educational tours for school children and teachers. These travelers usually look for minimum prices, and some consumers apparently assume that an agency featuring religious or educational travel is more likely to be ethical and honest than a more crassly commercial agency. This isn't true, of course; several of the failures I've observed have involved religious or educational operators.

A state restitution fund will probably protect California residents who lost money with any of the three agencies. And travelers living anywhere who used a credit card to buy tours from these agencies can probably have their accounts reimbursed. But at least some hopeful travelers will be left without recourse.

There's no foolproof way to determine, in advance, if any individual agency or tour operator is honest, ethical, or financially sound, even when it specializes in religious or educational travel. Moreover, even if it has no intention of cheating you, an honest and ethical agency can run into financial problems. Accordingly, no matter where you live—and how rare such failures have become—it's a good idea to protect yourself against this sort of risk:

• Always use a credit card—not a debit card, money order, or personal check—to buy travel. The credit card chargeback provision is one of the strongest protections available to any U.S. consumer.
• Buy trip-cancellation insurance to cover any prepayment large enough that you can't afford to walk away from it if something goes wrong. And buy your insurance from an independent insurance agency: Even though most good travel insurance policies cover supplier failure, they do not cover the financial failure of the organization that sells you the insurance.