When you default on your credit card debt, the credit card company charges off the debt and sells your balance to a collection agency after 180 days. Because collectors buy debts for far less than the amount you owe, the company that collects the debt keeps a significant portion as pure profit. This gives debt collectors a strong incentive for recovering defaulted credit card debts. Arbitration is one of the many collection options at the debt collector's disposal.
How It Works
Through arbitration, a neutral third party hears both sides of the case, then renders a legally binding decision. The goal of arbitration is to settle legal issues without going to court. Arbitration differs from court in that an arbitration decision is final. You have the option to appeal a court decision, but lose the right to an appeal when you bring your case before an arbitration board.
Arbitration's Dangers
Arbitration carries far greater benefits for collection agencies than it does for consumers. If a collection agency files a lawsuit against you, you can demand that the company prove that you owe the debt. If the company cannot provide the court with adequate proof, the judge reserves the right to dismiss the case. Arbitration does not follow the same set of regulations as civil lawsuits and a collector doesn't have to provide an arbitration board with the same evidence it would need to provide to a court. Consumers lose arbitration cases 94 percent of the time, according to 2007 Public Citizen study of California cases brought before the National Arbitration Forum -- the nation's largest arbitration group.
Arbitration Clauses
Arbitration not only has a higher success rate for creditors than lawsuits, but it also is a cheaper alternative to taking legal action because the creditor is not responsible for attorney fees and court costs. Credit card companies include clauses within their contracts noting that, in the event your credit card account falls into default, you must submit to arbitration. Collection agencies often force unwilling consumers into arbitration over defaulted credit card debts by citing the arbitration clause in the original credit card contract.
Effects of Arbitration
If the arbitrator sides with you, you win the case without penalty. If, however, the arbitrator sides with the collection agency, the collection agency can take proof of the arbitrator's decision to your county courthouse. The court will then issue a judgment in the collection agency's favor as a result of the arbitration ruling. A post-arbitration judgment provides a debt collector with the same collection rights it would have after winning a lawsuit. A debt collector can use this judgment to force you to pay off your unpaid credit card balance through garnishment, bank levies and property liens
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