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Blumenthal's proposal would require retailers to establish a separate account for money from the purchase of gift cards so it can be held in escrow.
An alternative to an escrow account could be the establishment of a state fund that would reimburse consumers who hold gift cards from stores that go out of business, Blumenthal said.
The fund would be similar to one that reimburses victims of home improvement contractors who walk away from jobs. The fund, Blumenthal said, would be created with fees paid by retailers.
"Countless consumers are stuck with worthless cards and certificates," Blumenthal said. "Bankrupt Tweeter recently threatened to default on its gift cards, only to honor them after my office intervened."
Blumenthal said his proposed legislation comes at the start of what's expected to be a tough holiday season for cash-strapped consumers, one that could see may lead to more store closings.
Timothy Phelon, president of the Connecticut Retail Merchants Association, could not be reached for comment Friday.
Experts say shoppers should consider a retailer's financial health before buying a gift card. According to America's Research Group, a consumer-behavior research company, about 80 percent of American consumers have given a gift card as a holiday present in the past five years.
With more retailers struggling this year, consumers holding gift cards could find them worthless after the new year, Blumenthal said.
When Sharper Image filed for bankruptcy in February, $20 million in unredeemed funds remained from patrons' prepaid gift cards.
Blumenthal said consumers should seriously consider another gift alternative: cash.
"Cold, hard cash may be crass, but it's forever," Blumenthal said.
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