How Credit Card Arbitration Works

April 29, 2024

How Credit Card Arbitration Works

If you have a credit card or loan debt like most Americans, it’s vital to understand your rights and those of your creditors. Many credit contracts contain provisions for binding mandatory arbitration. Learn what credit card arbitration is with the help of ZumaZip.com

If you’ve encountered a dispute with a creditor, you may have encountered mandatory arbitration, an alternative dispute resolution method that bypasses traditional legal trials. While either party, creditor or debtor, can trigger mandatory arbitration, both typically seek to avoid it due to its associated costs.

In mandatory arbitration proceedings, the initiating party engages a neutral third party to arbitrate the dispute resolution. For example, a creditor may enlist a third-party arbiter to assess a debtor’s history of non-payment and issue a ruling in their favor, potentially resulting in a judgment enabling the collection of owed funds.

Alternatively, debtors can also instigate mandatory arbitration against creditors, though such actions are less common unless substantiated by valid reasons.

Make a Motion to Compel Arbitration.

Our Motion to Compel Arbitration is the best way to beat a credit card debt lawsuit. Many debt collectors will simply give up after receiving it.

Why credit card companies opt for arbitration

Credit card companies typically opt for court proceedings over arbitration unless there are compelling financial incentives to pursue the latter. Arbitration processes tend to incur higher costs compared to litigation in court, making a Complaint from a creditor a more common occurrence than a motion to arbitrate.

However, a notable exception arises when substantial debts are involved. In cases where a debtor owes a considerable sum, such as $50,000 in credit card debt, creditors may choose arbitration despite the higher expenses, as it offers a potentially stronger position to uphold their claim.

Court cases afford debtors the opportunity to present arguments and enlist legal representation, potentially resulting in judgments unfavorable to creditors and significant financial losses. Conversely, arbitration proceedings tend to favor creditors, as evidenced by public arbitration data from California, suggesting similar outcomes across other states.

Importantly, the outcome of an arbitration claim typically cannot be appealed unless significant grounds, such as fraud or a conflict of interest involving the arbiter, are present. Minor disputes regarding debt amounts or repayment histories do not suffice as grounds for appeal; instead, substantive issues necessitating a reassessment of the arbitration process are required.

When you should consider arbitration

Arbitration can present an advantageous option in cases where the debt amount is relatively low. For example, if an individual owes $500 to a credit card company and pursues arbitration through a Motion to Compel Arbitration, the creditor might opt to concede the case due to the considerable expense associated with arbitration proceedings. The costs of arbitration arrangements can amount to thousands of dollars, exceeding the outstanding debt.

However, it is essential to temper expectations, as the final determination of whether arbitration is suitable rests with the judge. Thus, initiating arbitration requires a substantiated rationale, as evading debt repayment does not constitute a valid basis for pursuing this course of action.

For more context, consider the following example.

Example: Melissa, a debtor to Retail Cards for You with a $1,000 outstanding balance, sought recourse through arbitration due to financial constraints hindering her ability to fulfill payments. In pursuit of debt resolution, she initiated legal proceedings by filing a Motion to Compel Arbitration with her local jurisdiction. Upon thorough evaluation, the presiding judge deemed her claim lacking in merit, resulting in its dismissal. Consequently, Melissa incurred financial loss from associated legal expenses without alleviating her debt obligation to Retail Cards for You, which remains at $1,000.

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 and AAA represent two distinct arbitration entities with differing fee structures and implications for parties involved in disputes. JAMS, established earlier, imposes fees on the initiator for its services, whereas AAA, a newer alternative, tends to favor creditors due to its cost-effectiveness. Notably, AAA reports that nearly half of all cases incur no arbitration fees, enhancing its appeal to creditors seeking efficient resolution methods.

Following the emergence of AAA, many creditors opted to amend their agreements, granting consumers the option to select between JAMS and AAA for arbitration proceedings. In most scenarios, it is advisable to stipulate JAMS for third-party arbitration in agreements with creditors. By doing so, creditors are burdened with fees that may render further pursuit of the case financially inefficient, potentially tilting the resolution process in favor of the debtor.

How does a Motion to Compel Arbitration work?

The majority of individuals prefer to address their debts directly by either paying them off or negotiating settlements with creditors, rather than resorting to arbitration. However, in cases where a creditor sells the debt to a collection agency, familiarizing oneself with the arbitration process becomes prudent, as it could potentially offer advantages in specific circumstances.

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.

In the event of a legal claim filed by a creditor or debt collection agency, it’s essential to respond by submitting an Answer to the local court. Alongside the Answer, include a Motion to Compel Arbitration, explicitly expressing a preference for resolution through JAMS and requesting the creditor to cover the arbitration fees upfront.

Upon judicial approval of arbitration, the creditor is obligated, as per the credit card agreement, to cover the costs of arbitration. Opting for JAMS ensures that the creditor cannot select the cheaper alternative, AAA.

Subsequently, the creditor will weigh the cost of JAMS arbitration against the potential recovery of the debt before deciding on further action, including debt write-off.

It’s worth noting that the opportunity to select JAMS over AAA may not always be available, as some credit card agreements lack specific provisions regarding third-party arbitration. It is imperative to thoroughly review the terms of your credit card agreement before considering arbitration as a recourse.

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

It’s understandable that dispute resolution might not have been a primary concern when initially signing up for a credit card. Typically, individuals acquire credit cards with the intention of responsibly managing borrowed funds.

Nevertheless, it’s paramount to grasp your rights concerning credit cards to effectively navigate any potential disputes with your lender. This understanding ensures that you’re prepared for any eventualities that may arise in your financial interactions.

What happens in arbitration?

Here are some valuable insights on arbitration from a debt lawyer:

Motion to Compel Arbitration: Initiating a Motion to Compel Arbitration facilitates the transfer of a case from a traditional court setting to a private arbitration forum.
Cost-Benefit Analysis: Arbitration can prove advantageous, particularly if the arbitration expenses for the creditor surpass the debt’s value, potentially resulting in the dismissal of a debt lawsuit.
Cost Consideration: Arbitration can be costly, as arbitrator fees are typically shared between both parties involved.
Informality of Process: While similar to a court trial, the arbitration process is generally less formal and does not involve a jury.
Financial Threshold: For cases involving sums under $30,000, arbitration may be strategically advantageous, as the high costs involved could deter creditors from pursuing legal action.
Contractual Terms: Understanding the terms outlined in the contract is crucial, as they dictate who bears the arbitration fees. If the contract assigns responsibility for these costs to the debtor, arbitration may not be the most favorable option.
Strategic Intent: Demonstrating a clear intent to contest the case can incentivize creditors to explore settlement options outside of court.
Self-Representation: Debtors possess the capability to negotiate debt settlements independently, provided they possess a comprehensive understanding of their case.

These tips provide a useful framework for navigating the arbitration process and making informed decisions in debt-related legal matters.

What is ZumaZip?

ZumaZip is a convenient solution designed to streamline your response to a debt collection lawsuit. Here’s a breakdown of what you can expect when you use ZumaZip:

Firstly, you’ll access our user-friendly web application, which guides you through the process step by step. You’ll be prompted to answer a series of questions related to your specific situation. Once you’ve completed the questionnaire, you have the option to either print out the finalized forms and mail them to the appropriate courts yourself, or you can opt to utilize ZumaZip’s services to file them on your behalf. Additionally, if you choose this option, an attorney will review your document for added peace of mind.

If you’re seeking guidance on how to effectively respond to a debt collection lawsuit, ZumaZip can provide the assistance you need. Feel free to explore our FAQs for more information on what ZumaZip has to offer.

What if I haven’t been sued yet?

If you’ve only received a collections notice, but not a lawsuit, the best way to respond is with a Debt Validation Letter. When a debt collector contacts you in any way, whether it’s by phone or mail, you can respond by formally requesting a debt validation with a Debt Validation Letter . This letter notifies the collector that you dispute the debt and forces them to provide proof you owe the debt. They can’t call you or continue collecting until they provide validation of the debt. This flowchart shows how you can use a Debt Validation Letter to win.

Get started with a Debt Validation Letter here.

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Here’s a list of guides on how to respond to a debt collection lawsuit in each state:

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Hey there! Facing off against a debt collector can feel like a daunting challenge, but fear not! We’re here to help you navigate through it all with our handy guides designed to assist you in beating every debt collector you encounter. Whether you’re facing a new lawsuit or dealing with a persistent collector, we’ve got your back. Stay positive, stay informed, and let’s tackle this together!

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Below are some resources on how to use an arbitration clause to your advantage and win a debt lawsuit.

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