Arbitration for Unsecured Debt

Lenders of unsecured debt, such as credit card companies, have a vested interest in getting their money back from you. However, they also have limited options compared to secured debt lenders because they have no claim on any of your assets. They risk receiving no reward in court if you have no money to pay them with. One method they may use to collect unsecured debt is debt arbitration. An arbitration requirement may be part of your credit card contract.

Process

Your creditor first mails you an arbitration notice. If you don't understand the notice or don't believe you owe the debt, this is your opportunity to request more information or debt validation. Provided the debt is valid, you begin the process. At this point, you may wish to contact a lawyer to represent you. Each side explains its position to the debt arbiter, who is a neutral party in the dispute. The arbiter's decision is binding even if you choose not to participate in the process. If you disagree with the decision, you may challenge it in court.

Benefits

Successful debt arbitration can result in a payment schedule you can meet to successfully pay off your debt and save you substantial amounts in interest and fees. The process can also save you from damage to your credit score as a result of the debt. Additionally, a successful arbitration should end harassment by the collection agency, provided you adhere to your part of the settlement.

Risks

The arbitration ruling may be unfavorable to you or you may continue to be unable, or unwilling, to make payments. In this case, the collection agency may go to court to confirm the award. The court may garnish your wages to pay the debt or allow the collection agency to withdraw the money directly from your bank account. The arbitration may also have a negative impact on your credit score. Arbitration itself can be an expensive process, requiring you to pay fees and hire a lawyer to represent you. Always confirm the fees you'll be charged before entering into an arbitration process.

Considerations

The arbitration process has the potential to be either beneficial or harmful to you. A large factor in the outcome is the arbitration service used and the lawyer you choose to represent yourself. Research the service's reputation by checking its record with the Better Business Bureau, which records complaints received against companies and the resolutions to those complaints. Steer away from companies that have multiple complaints on file.

Choose a lawyer who specializes in debt arbitration. Your state bar association can provide referrals for lawyers in this area. Check for complaints against the lawyer with the Better Business Bureau.