Should You Go to an Arbitration Hearing Over Bad Debt Without an Attorney?

If your bills have gotten the best of you but bankruptcy seems too drastic, debt arbitration may be the answer. Arbitration allows you to negotiate a lower payoff amount for your debt with fewer credit hassles than bankruptcy. However, while debt arbitration might save you from the consequences of bankruptcy, it is still a legal proceeding and you need to go in prepared. Having a lawyer by your side can make a difference in the kind of settlement you get.

Debt Arbitration Process

In a debt arbitration, a neutral third party called an arbiter will evaluate your case and the case of your creditor and make a decision on how the debt should be repaid. In most cases, the arbitration process is essentially a negotiation in which you and your creditor try to come to terms on a reduced amount it will accept to settle your debt. You will be allowed to present information about the financial situations that led to your debt and your ability to repay. Decisions by the arbiter are legally binding and both parties must agree up front to abide by the arbiter's ruling.

Entering Debt Arbitration

Arbitration requires the consent of both parties -- you cannot be forced into arbitration outside of bankruptcy, and your creditor can decline to enter arbitration. You can request an arbitration from your creditors yourself, but many debtors hire a credit counseling service or debt negotiation service that requests arbitrations on their behalves.

If you want to hire a company to help you set up arbitration, proceed with caution. Although there are legitimate debt counseling companies, there are also companies that offer less than fair deals to consumers. The Federal Trade Commission offers advice on finding a good credit counseling service on their website (see Resources). According to Debt Management.net, avoid companies that charge a fee upfront and that charge more than 20% of your total debt for their services.

Legal Help

You are not legally required to have an attorney represent you at an arbitration, but you should. During arbitration, your creditor will have legal representation and an experienced negotiator working for it. If you try to face the creditor alone, you are unlikely to get the best deal on your settlement. If you go through a credit counseling service to set up your arbitration, it may provide you with a representative. If not, consult a bankruptcy/debt attorney before negotiations begin. Your state bar association can point you in the direction of a qualified lawyer near you.

Debt Arbitration Consequences

In most cases, debts are not forgiven during debt arbitration. Instead, settlements for lower amounts are reached, which means you will still be facing a bill. Once you pay off that amount, your debt will be reported as "settled" to the credit bureaus, rather than "paid in full." This mark will lower your credit score because it lets future lenders know that you paid less than the total amount of your debt.

The good news is that unlike bankruptcy, once your debt is paid, you can begin rebuilding your score immediately. According to LowerMyBills.com, your credit score will recover much more quickly than it would after a bankruptcy. Further, unlike bankruptcies, arbitrations do not become a part of the public record.