Debt collection arbitration is a legal proceeding that lenders use to attempt to collect money owed. It is used to settle a debt dispute in much the same way as a court proceeding would. However, arbitration saves time and money for both parties.
Arbitration Can Settle Debt Disputes
Because it is time- and cost-effective, arbitration is preferred to courts by many companies. Some exclusively use arbitration for debt disputes. If this is the case, it will say so in your contract.
When you sign up for products or services that involve any kind of credit arrangements, be sure to look through your contract. It will state whether the company has chosen arbitration as a mandatory means of settling any issues that arise.
You’ll often find arbitration clauses in contracts for cell phone services and other purchases that involve credit-based billing, as well as in credit card agreements. You may even find arbitration clauses in the paperwork at your doctor’s office.
How Does Arbitration Work?
When you owe money to a company, you’ll typically receive several notices of your overdue bills. After the company has directly attempted to collect money from you, it can send you an arbitration notice.
Read everything and make sure you understand it all. If you don’t, ask the arbitrator or a lawyer to explain it to you. This is especially important if you believe you do not owe the debt in question.
Arbitration can cost you money. Ask the arbitration company, called the forum or provider, how much you’ll be expected to pay if you lose the case. If you cannot afford it, ask as soon as possible if you can apply for a fee waiver or if there is a less expensive option, such as arbitration by phone or email rather than in person.
During arbitration, the debt dispute is handled and resolved by a third-party forum. A trained individual called an arbitrator will listen to both parties involved.
During the hearing, you’ll have an opportunity to argue your case. Keep files on the debt, and prepare any evidence you believe could help you. It’s also a good idea to request copies of your credit reports to make sure there are no errors regarding that debt. This paperwork can help you make your case during arbitration.
If you do not participate in the arbitration process, you’ll likely receive a default judgment against you, meaning you automatically lose the case.
Outcomes of Arbitration
Based on the arguments of both parties, the arbitrator will come to a verdict and decide on a solution that follows legal standards.
If the arbitrator rules against you and decides you owe money, your creditor must bring the decision to a court to be confirmed.
Once the judgment is finalized, the court may choose to issue a garnishment order against you. This allows your creditor to take money directly from your paycheck or bank account in order to cover your debt. Some funds such as federal benefits, however, are exempt from garnishment.
An arbitrator’s decision against you can negatively affect your credit history and score, making it more difficult for you to open new lines of credit in the future.
Outcomes of arbitration are often binding, and there are very few reasons you can contest the arbitrator’s decision. The decision usually can only be fought if the arbitration proceeding was not fair.
Arbitration Must Be Fair
Certain laws ensure the complete fairness of arbitration processes.
A creditor must notify you about the arbitration process before it occurs. Improper notification could lead an arbitrator to rule in your favor, while timely notification gives you an opportunity to prepare.
- Tip: When you receive notice of an impending arbitration process, begin keeping thorough files on the debt in question.
A creditor must use an outside arbitration company that is impartial and has no links to the creditor. This means there can be no conflicts of interest and the arbitrators cannot show any bias.
- Tip: When facing arbitration, research the arbitration company to make sure it is impartial and unbiased. Evidence of bias could give you grounds for a legal appeal.
Problems with Arbitration
The Federal Trade Commission (FTC) has stated that debtor participation in the arbitration process is unsettlingly low. It blames the lack of participation on numerous problems with the system. In recent years, the FTC has highlighted some of the problems and is working toward correcting them. Some arbitration issues include the following:
- Consumers are not given a meaningful choice about arbitration. Rather, their contracts state upfront that arbitration will be used in the event of a debt dispute, and consumers cannot opt for other solutions.
- Arbitration forums often show bias or an appearance of bias, making the dispute seem futile on the part of the debtor.
- Debtors are not given adequate notice of arbitration proceedings.
- Arbitration is too costly for consumers.
- Arbitrators do not provide adequate information on the reasons for their decisions.
- Consumers do not have a good understanding of the arbitration process and its implications.
Although the arbitration process has its flaws, it is commonly viewed as the simplest and most effective way to deal with debt disputes. Consumers involved in arbitration should utilize their rights and fight the debt if they believe they do not or should not owe it.