When a creditor or collection agency decides it can’t collect the money owed by a consumer, it usually will resort to debt collection arbitration to settle the matter.
Debt collection arbitration is an alternative form of resolution in which both sides present evidence to an arbitrator who is hired to examine the facts, consider the evidence and settle the dispute. The arbitrator is not a judge and the hearings are not held in a courtroom, but arbitration is a legal proceeding and the arbitrator’s decision is binding, whether the consumer shows up for the hearings or not.
Almost every contract agreement with a company includes a mandatory binding arbitration clause to protect the company should there be a dispute with the consumer. This is especially true in credit card agreements, cell phone service, auto loans and medical services contracts. Most mandatory binding arbitration agreements include wording that prohibits the consumer from joining a class action suit against the business.
Mortgage brokers are the only major lending industry without mandatory binding arbitration clauses in their contracts. Mortgage companies used to have them in contracts to resolve certain disputes instead of going to court, but mandatory binding arbitration clauses are no longer allowed in mortgage agreements. Consumers can agree to resolve a mortgage issue through arbitration, but they can’t be required to accept it.
When you sign up for products or services that involve any kind of credit arrangements, be sure to read your contract closely. It will state whether the company has chosen mandatory binding arbitration as the means of settling any issues that arise. If you don’t want to have disputes resolved in arbitration, you will have to find a company that does not have this as part of their contract.
Arbitration Results Favor Creditors
The outcomes of arbitration weigh heavily in favor of the business, according to a study done by the Consumer Financial Protection Bureau (CFPB) in 2013.
The CFPB studied mandatory binding arbitration cases involving credit card, debit card, payday loans, prepaid cards, private student loans and auto loans.
Using data from 2010–2012, the CFPB found that consumers were represented by lawyers about 60% of the time. Companies almost always had counsel.
During a 2-year period (2011–2012), the CFPB found that of the 341 cases resolved, consumers won only 32. Put another way, businesses won 91% of the time.
For the 52 cases in which consumers made claims of less than $1,000, arbitrators resolved 19 of them and granted consumers relief in 4 of the 19.
There were another 244 cases in which companies made claims or counterclaims against consumers. The companies won 227 of them or 93% success rate. The total amount of relief the companies received was $2,806,662.
The CFPB says that cases that were either settled or resolved by an arbitrator lasted an average of five months.
How Does Arbitration Work?
If you are late with payments to a company, you typically will receive several notices of your overdue status. If the company is unsuccessful in collecting the money owed after direct contact with you, it will contact a company that administers the arbitration process and start a proceeding against you.
The administrators, often called “providers” or “forums”, start the process by mailing an arbitration notice to you. Read the arbitration notice carefully when you receive it. If you don’t understand something in it, call the “provider” and ask questions. This is especially important if you believe you do not owe the debt. This also is the time most people call a lawyer to represent them.
During arbitration, the debt dispute is handled and resolved by an arbitrator. In most cases, the “provider” offers the parties involved a list of three people to serve as arbiters. Each side may strike one of the three and whoever is left, serves as arbiter.
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.
Forums and Protocols
In some cases, consumers may have a say in choosing both the “provider” (or “forum”) and the venue at which an arbitration hearing is conducted.
If you have a choice among “providers,” it is best to research their website and use search engines to find forums where you can read about other people’s experiences with them. This should help in choosing one.
As for venues, arbitration hearings can be conducted in an office, over the telephone or through mail or email. Because of the expense and time involved in traveling, you may want to limit costs and choose something other than an in-person hearing at an office. Ask if there is an option to change the hearing to a conference call or if it can be done through mail or email.
The rules that govern the process are called “protocols” or “procedures.” The protocols include deadlines, obligations and costs. This information should be available on the “provider’s” website.
Arbitration will cost you money. The “provider” should have a schedule that explains fees and costs associated with a hearing and how much each party must pay. If you can’t afford it, ask as soon as possible if you can apply for a fee waiver.
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, where a judge will confirm it.
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 like Social Security 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.
Disputing Arbitration Decision
Outcomes of arbitration are binding, and there are only two options to pursue if you disagree with the arbitrator’s decision. You can either challenge the collector’s request that the courts confirm a judgment against you, or you can go to court yourself and contest the award.
Unfortunately, there are very few reasons you can challenge the decision. Arbitrators are not required to take the law or legal precedent into account when making their decision and states do not require “providers” to publish the results. Thus there are very few grounds on which to appeal.
One is arbitrator misconduct, another is to compel discovery to support the claims against you and a third is to challenge the validity of having an arbitration clause in the contract.
Arbitration Must Be Fair
Certain laws attempt to ensure the complete fairness of arbitration processes, but there always is a subjective aspect involved with every human.
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.
Consumers involved in arbitration should utilize their rights and fight the debt if they believe they do not or should not owe it. However, the odds are stacked heavily against consumer success in arbitration.