Debt collection arbitration is a process for resolving unpaid debt that is seriously, sometimes hopelessly, in arrears.
If being desperately and deeply in debt describes you, and settling up for less than the full amount you owe (without declaring bankruptcy) seems appealing, read on.
Lender-Initiated Debt Arbitration
You’re in over your head, and despite several notices detailing your overdue status, you’re behind and destined to stay that way. If, having made direct contact with you, the original lender or the debt collector who purchased the debt, concludes attempts to collect the money will be unsuccessful, they will contact a go-between, a company that administers the arbitration process to begin an action against you.
Once the arbitration process is set in motion, you will receive a notice in the mail, which is the official form of communications in debt collection arbitration or debt collection settlement or debt collection negotiation as it is sometimes called.
Arbitration administrators do not contact consumers by phone, text or email. They will not call you and demand immediate payment via cash card, or threaten that sheriff’s deputies will take you to jail. If that happens, it’s a scam.
Again, debt collection arbitration administrators, often called “providers” or “forums,” will initiate contact through the mail.
The arbitration notice will alert you that the process has begun, and what to expect. This might be a good time to seek legal advice since rules, sometimes called “protocols” or “procedures” govern the process and must be followed. Ultimately, your case is going to wind up in front of a third, neutral party, who will listen to both sides of the argument and ultimately decide what’s what.
It is imperative, then, that you read, study, and understand the details in the notice. If any of it confuses you, do not delay: Call the provider and ask your questions.
This is particularly important if, believing you do not owe the debt, you intend to put the claim into contest. This is also the moment most people recruit a lawyer to represent them.
Once a lender or debt collector begins the process, it cannot, and must not, be ignored. Failure to participate not only means your side will not be heard, in all likelihood it will result in a default judgment against you.
Debtor-initiated arbitration, also known as debt settlement, debt negotiation, or credit settlement, is an attempt to reduce the balance owed that the debtor and creditor agree will be regarded as payment in full.
Cold-call solicitors make it sound enticing. “Did you know you have the legal right to reduce the debt you owe to the credit card company by half?” Thank them and hang up.
This particular gambit is not for the faint of heart. To be sure, negotiating crushing debt burden into manageability sounds alluring, but its downsides are substantial: While debt-negotiating companies make big promises, you actually may pare only a small amount from your total debt; the damage to your credit rating will be as significant, and as lasting (seven years) as an outright bankruptcy; and, because the IRS can regard the forgiven debt as income, you could wind up owing taxes.
Here’s the scary part: When you’re the initiator and you work through a debt-settlement company, they ask you to stop making payments to the lender. Late payments, interest, and penalties pile up; meanwhile, you’re sending money to the debt-settlement company, which puts your money in escrow.
After a while, the settlement company will contact your creditors in an attempt to get them to accept the lump sum that has piled up, and write off the rest as bad debt.
It doesn’t always work out. Either way, your credit will be wrecked for seven years.
We cannot stress this enough: Be careful. You can pursue arbitration yourself, outside the risky schemes of debt-settlement companies, but it’s usually rough going. According to a 2015 report by the Consumer Financial Protection Bureau, debtor-initiated arbitration rarely turns out well, particularly for debtors who represent themselves. If you’re determined to try, retain a lawyer, or consult with a nonprofit credit-counseling service whose experts may be able to provide a far better path to financial health.
Know, also, this: Debt arbitration cannot be used to settle or reduce secured debts, such as student loans, child support, alimony, or taxes.
Mandatory binding arbitration is a standard clause in almost every company’s contract agreement to protect against costly courtroom disputes with consumers. Instead, disagreements are resolved and handed down by neutral third parties. Careful readers of fine print are familiar with binding arbitration language in agreements you’ve made with distributors of credit cards, cell phone services, auto loans, and medical services, to name just a few.
According to an August 2016 report by the Pew Charitable Trusts, nearly three-quarters of all financial institutions include binding-arbitration clauses in their consumer agreements.
A conspicuous exception is the mortgage-making industry. Brokers and lenders are prohibited from requiring arbitration. Consumers can agree to resolve a dispute through arbitration, but they cannot be forced into it.
In short, binding arbitration clauses are everywhere, and they’re not going away. Using its powers under the Congressional Review Act, in November 2017 Congress revoked, and President Trump signed, a CFPB regulation that would have given consumers wider access to initiating class-action lawsuits against lenders and service providers who include binding arbitration in their contracts.
Opponents argued the regulation would have jacked up the cost of doing business, injuring consumers, while enriching only plaintiffs’ lawyers.
When you sign up for products or services that involve any kind of credit arrangements, read you contact closely. There you’ll learn whether the company has opted for mandatory binding arbitration to settle disputes. If that worries you, you’ll have to keep shopping.
Hiring a Representative
Whether you’re initiating a debt collection arbitrationor you’re the target of one, you don’t want to go it alone. A CFPB study published in May 2015 found arbitrators find overwhelmingly for companies, even when debts are in dispute.
Of course, you may think no one knows your financial situation better than you do, but it’s better to know the rules of the game, and how to strike the best deal to benefit you.
That’s where consumer debt attorneys or nonprofit consumer counseling services come in. Navigating debt arbitration is part of their everyday skill set. Indeed, frequently they have a working relationship with your creditors already, which can grease the slides to the best possible resolution for you.
Get yourself a trained professional, preferably one certified by the American Fair Credit Council (AFCC).
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 for the process. 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.
Keep Your Files and Receipts
Gather all available files on your debt(s) that will be covered in your arbitration case. If you don’t have the paper files, you probably can find them online with your creditor or service provider. Gather bank statements.
Request copies of your credit reports from the three main credit tracking companies (Experian, TransUnion, Equifax) and check them for errors.
Also, use certified mail and keep the receipts.
Make certain these documents and any other supporting evidence is in good order and easily produced to make the best possible impression when arguing your case.
Most Common Arbitrators
Chances are your case will wind up before one of the two most common — because they are the most reliable — arbitration groups: American Arbitration Association and JAMS The Resolution Experts (https://www.jamsadr.com, formerly Judicial Arbitration and Mediation Services, Inc.).
Both AAA and JAMS enjoy superior reputations, in part because they mandate protections for consumers — beginning with capped filing fees — in their processes. For instance, AAA and JAMS charge consumers a $200 and $250 filing fee, respectively, with the company assuming the balance of the liability.
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.
In other words, unless you can prove the claim of debt against you is false, you want to do all you can to avoid winding up in binding arbitration. One of the surest ways is go get your financial house in order, beginning by consulting with a nonprofit credit counseling service.
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.