How Credit Card Arbitration Works

Sarah Edwards | March 07, 2023

If you’ve ever been in a dispute with a creditor, you may have been subject to mandatory arbitration. Mandatory arbitration is a type of alternative dispute resolution that foregoes a legal trial. While either a creditor or the debtor can initiate mandatory arbitration, both parties try to avoid it since it can be expensive.

During mandatory arbitration, the initiating party asks a third party to oversee the outcome of a dispute. For instance, the creditor might ask a third-party arbiter to review your record of non-payment and rule in their favor, allowing them to collect money from you via a judgment.

You can also initiate mandatory arbitration against the creditor. However, few people choose to do so unless they have a valid reason.

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Why credit card companies opt for arbitration

Credit card companies won’t choose arbitration over a court case unless they have a compelling financial reason for doing so. Credit card arbitration is usually more costly than simply suing you in court. Thus, you’re more likely to receive a Complaint from a creditor than a motion to arbitrate.

The primary exception to this rule is when you owe a significant amount of money to a creditor. For instance, they might arbitrate your case if you’ve racked up a $50,000 credit card debt with a creditor and stopped making payments. The cost of arbitration is more expensive, but there’s less chance of losing their claim against you.

In a court case, debtors can hire attorneys or present arguments that a judge might agree with. As such, the creditor could lose a judgment worth thousands of dollars.

On the other hand, arbitration cases are usually more likely to resolve in favor of the creditors. At least, this is true for California, the only state that publishes arbitration for the public. It can be safely assumed that the results are similar in other states.

It’s important to note that if you lose an arbitration claim, you can’t appeal the outcome unless you have a significant reason.

A minor disagreement regarding the dollar amount of your debt or your repayment history isn’t sufficient grounds for an appeal. Instead, you’ll need to show that your case involved fraud or a conflict of interest on the part of the arbiter.

When you should consider arbitration

One scenario where arbitration may be advantageous is when your account isn’t worth much.

For instance, if you owe $500 to a credit card company and file a Motion to Compel Arbitration, your creditor may simply give in and walk away from the case because of the high cost of arbitration. Arranging arbitration can cost thousands of dollars — much more than you currently owe.

Don’t get too excited just yet, though. A judge will make the final decision about whether arbitration is appropriate, meaning you must have a solid reason for initiating it. Avoiding paying the debt isn’t one.

For more context, consider the following example.

Check out the following video to learn more about how arbitration can help you.

There are two arbitration groups common to creditors: JAMS and AAA

The two main arbitration groups are Judicial Arbitration and Mediation Services, Inc. (JAMS) and American Arbitration Association (AAA).

JAMS is an older organization that requires the initiator to pay fees for its services, while AAA is a newer service that benefits creditors since it’s cheap. According to AAA, nearly half of all cases incur no arbitration fees.

When AAA came along, many creditors amended their agreements to allow their consumers to choose between JAMS and AAA. In most situations, it’s better to require your creditors to handle third-party arbitration through JAMS since they’ll incur fees that may make it inefficient to pursue further action on your case.

How does a Motion to Compel Arbitration work?

Most people don’t seek out arbitration with their creditors. They’d rather pay their debts off or settle them. However, if your creditor sells your account to a debt collection agency, it’s wise to understand the arbitration process, which may benefit you in certain situations.

Upon receiving notice that your account is with a debt collection agency, ask them to validate the debt. If you can afford it, settle the debt or set up a repayment plan. If you can’t, be aware that the debt collection agency may initiate a lawsuit against you.

If the creditor or debt collection agency files a legal claim against you, you’ll want to file an Answer with your local court. Include a Motion to Compel Arbitration along with the Answer, but specifically indicate that you prefer resolution through JAMS and ask for the creditor to advance the arbitration fees.

If a judge approves the arbitration, the creditor must pay for the arbitration per your credit card agreement. By electing JAMS, you’re ensuring they can’t choose AAA, which is cheaper.

Your creditor will decide whether paying for JAMS is worthwhile or whether they should simply write off the debt.

It’s important to realize that you won’t always have the opportunity to choose JAMS over AAA. In some cases, creditors don’t have stipulations concerning third-party arbitration. Read your credit card agreement carefully before considering arbitration.

Getting sued for debt? File a Motion to Compel Arbitration to avoid going to court.

It’s essential to understand your legal options with your creditors

You probably weren’t worried about dispute resolution when you first signed up for a credit card. After all, most people obtain credit cards intending to repay the money they borrow.

Still, it’s crucial to understand your rights when it comes to credit cards. That way, you’ll know what to expect if you ever have a dispute with your lender.

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