How Credit Card Arbitration Works: Your Complete Guide

If you have credit card debt, you need to understand your rights. Many credit contracts contain provisions for binding mandatory arbitration. Arbitration is a type of alternative dispute resolution that avoids a legal trial.

During mandatory arbitration, a third party oversees the outcome of a dispute. Either you or your creditor can initiate the process. However, both parties typically try to avoid it because of the high costs involved.

The creditor might ask a third-party arbiter to review your payment history. The arbiter can rule in their favor, allowing them to collect money through a judgment. You can also initiate arbitration against the creditor if you have valid grounds.

Why Credit Card Companies Choose Arbitration

Credit card companies rarely choose arbitration over court unless financially necessary. Arbitration typically costs more than filing a lawsuit against you. You’re more likely to receive a court complaint than an arbitration motion.

The exception occurs when you owe a significant amount of money. If you’ve accumulated $50,000 in credit card debt and stopped paying, they might arbitrate. The cost is higher, but their chances of winning increase dramatically.

In court cases, you can hire attorneys or present arguments that sway judges. The creditor could lose a judgment worth thousands of dollars. Arbitration cases usually resolve in favor of creditors, at least according to California data.

California is the only state that publishes arbitration results publicly. The outcomes are likely similar in other states. Our partner Solo can help you understand your options when facing a debt lawsuit.

If you lose an arbitration claim, you can’t appeal the outcome easily. Minor disagreements about debt amounts or repayment history aren’t sufficient grounds. You’ll need to prove fraud or a conflict of interest by the arbiter.

When You Should Consider Arbitration

Arbitration may work in your favor when your debt is relatively small. If you owe $500 to a credit card company, filing a Motion to Compel Arbitration might discourage them from pursuing the case.

Arranging arbitration can cost thousands of dollars, far more than small debts. Your creditor may walk away rather than pay expensive arbitration fees. However, a judge makes the final decision about whether arbitration is appropriate.

You must have a solid reason for initiating arbitration. Simply avoiding the debt won’t convince a judge to approve your motion.

Example: Joan owes Retail Cards for You $1,000. She files a Motion to Compel Arbitration, hoping they’ll write off her debt. After reviewing Joan’s claim, the judge dismisses it as frivolous. Joan loses her court filing fees and still owes $1,000.

Two Main Arbitration Groups: JAMS and AAA

The two primary arbitration organizations are Judicial Arbitration and Mediation Services (JAMS) and American Arbitration Association (AAA). Understanding the differences between them is crucial for your strategy.

JAMS is an older organization that requires the initiating party to pay fees. AAA is newer and benefits creditors because it’s cheaper. Nearly half of all AAA cases incur no arbitration fees.

When AAA emerged, many creditors amended their agreements to let consumers choose between JAMS and AAA. It’s usually better to require creditors to use JAMS for arbitration. They’ll incur higher fees that may make pursuing your case inefficient.

How a Motion to Compel Arbitration Works

Most people don’t seek arbitration with their creditors voluntarily. They prefer to pay their debts or settle them instead. However, if your creditor sells your account to a debt collector, understanding arbitration becomes important.

When you receive notice that a debt collector has your account, ask them to validate the debt first. If you can afford it, settle the debt or arrange a repayment plan. If you can’t, be prepared for a potential lawsuit.

If the creditor or debt collector files a lawsuit against you, file an Answer with your local court. Include a Motion to Compel Arbitration along with your Answer. Specifically indicate that you prefer resolution through JAMS and request that the creditor advance the arbitration fees.

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

Your creditor will then decide whether paying for JAMS is worthwhile or if they should write off the debt. Our partner Solo can help you file the proper documents to compel arbitration.

You won’t always have the opportunity to choose JAMS over AAA. Some creditors don’t have stipulations concerning third-party arbitration. Read your credit card agreement carefully before considering arbitration.

Understanding Your Legal Options With Creditors

You probably weren’t worried about dispute resolution when you applied for your credit card. Most people obtain credit cards intending to repay what they borrow.

Still, understanding your rights with credit cards is crucial. You’ll know what to expect if you ever have a dispute with your lender. Knowledge is power when dealing with debt collectors and creditors.

What Actually Happens During Arbitration

The arbitration process shares similarities with a court trial but remains more informal. Here are key points to understand about arbitration:

• Filing a Motion to Compel Arbitration transitions your case from court to a private arbitration environment.
• Arbitration can be beneficial when arbitration costs exceed the value of your debt for the creditor.
• Arbitration is expensive because both parties typically share the arbitrator’s fees.
• The arbitration process is more informal than court and doesn’t include a jury option.
• If you’re being sued for less than $30,000, arbitration might be strategic since high costs could discourage the creditor.
• Your contract terms determine who bears the arbitration fees, which affects your strategy significantly.
• Showing intent to challenge the case can incentivize creditors to settle outside of court.
• You can negotiate settlements without an attorney if you understand your case well.

The key to success with arbitration is understanding your credit card agreement. Check whether arbitration clauses exist and which organization handles disputes. Your strategy depends entirely on these contractual details.