How to Use Private Arbitration to Your Advantage in Debt Collection Lawsuits

Arbitration is an alternative method of resolving disputes in which two parties present their individual sides of a dispute to an arbitrator or panel of arbitrators. The arbitrator decides the rules, weighs the facts and legal arguments of the parties, and then decides the dispute. Arbitration may be voluntary or mandatory.

In voluntary arbitration, both sides in the dispute voluntarily agree to submit their dispute to arbitration after it arises, and they have an opportunity to investigate their best options for resolving their claim.

In forced arbitration, a company requires a consumer to submit any dispute that may arise to binding arbitration as a condition to buying a product or using a service. The consumer is required to waive their right to sue, to participate in a class action lawsuit, or to appeal. The arbitration is mandatory, the arbitrator's decision is binding, and the results are not public.

Forced arbitration is being written into more and more terms of agreement and contracts, including as relevant to this article: (i) credit cards, (ii) consumer credit loans; (iii) car loans and leases, to name a few.

One of the alleged benefits of arbitration is that it costs less than litigation, and that may be true for businesses but that's almost universally untrue for consumers. Forced arbitration frequently costs more than taking a case to court and can cost thousands of dollars. Individuals often have to pay a large fee simply to initiate the arbitration process. If they are able to get an in-person hearing, individuals sometimes have to travel thousands of miles on their own dime to attend the arbitration. In the end, the loser (usually the individual) often pays the company's legal fees.

Most arbitration provisions are very broad meant to cover a variety of different disputes. Below is an example of an arbitration provision taken from a credit card agreement with a popular bank:

RESOLVING A DISPUTE WITH ARBITRATION PLEASE READ THIS SECTION CAREFULLY. IF YOU DO NOT REJECT IT, THIS SECTION WILL APPLY TO YOUR ACCOUNT, AND MOST DISPUTES BETWEEN YOU AND US WILL BE SUBJECT TO INDIVIDUAL ARBITRATION. THIS MEANS THAT: (1) NEITHER A COURT NOR A JURY WILL RESOLVE ANY SUCH DISPUTE; (2) YOU WILL NOT BE ABLE TO PARTICIPATE IN A CLASS ACTION OR SIMILAR PROCEEDING; (3) LESS INFORMATION WILL BE AVAILABLE; AND (4) APPEAL RIGHTS WILL BE LIMITED.

• What claims are subject to arbitration

1. If either you or we make a demand for arbitration, you and we must arbitrate any dispute or claim between you or any other user of your account, and us, our affiliates, agents as it relates to your account.

As you can see, the language that I have highlighted above is extremely broad. The arbitration provision applies to any dispute or claim. One would make the logical inference that if a creditor sues someone in court for an overdue credit card or defaulted loan, that dispute itself is subject to arbitration. The court should then stay the lawsuit pending the outcome of the private arbitration.

I know of one Suffolk County case where a consumer debtor insisted that private arbitration applied to the credit card lawsuit. The creditor was seeking the sum of approximately $4,000 for an unpaid credit card. The consumer debtor, with the assistance of counsel, moved to compel private arbitration under the card member agreement.

The Suffolk County Court granted the motion to compel arbitration and directed the parties to take the dispute to private arbitration. The creditor upon learning that the fee to begin private arbitration is $1,500 (to be paid $1,250 by the company and $250 by the consumer) decided to walk away from the claim and give the consumer debtor a full release of the debt. Paying a $1,250 arbitration filing fee on a $4,000 was not a smart business or financial decision. This is a case where forced arbitration is more expensive than court for the company, where initial NYS court system filing fees range from $45 to $210.

Forced arbitration was put into credit card agreements as a shield to prevent consumers from filing expensive class action lawsuits against big banks. In any event, sophisticated consumers can use the forced arbitration agreements as a sword to beat back debt collection lawsuits. Consumers facing debt collection lawsuits on smaller debts can likely use forced arbitration as leverage in gaining a favorable settlement or having the claim dismissed completely.

Banks on the other hand, may want to consider revising the arbitration language in these agreements to make a small claims court exception, or craft language that somehow exempts its debt collection lawsuits from being covered by the forced arbitration agreement