How Does Credit Card Arbitration Work?
Written by: Kristy Welsh
Last Updated: October 21, 2017
Credit card arbitration is a form of alternative dispute resolution (ADR). Instead of taking a dispute between creditor and borrower to court, a resolution is sought through a third party, impartial arbitrator. The arbitrator's decision stands, with no opportunity for appeal. Most contractual agreements entered into between credit card companies and consumers include binding mandatory arbitration, in which both parties agree arbitration is the only means through which dispute resolution may be reached (i.e., waiving the right to have a judge or jury decide the case). Either the credit card company or the borrower may initiate arbitration.
That said, not all agreements do include a binding mandatory arbitration clause, in which case either party still has the choice to initiate arbitration or sue.
Benefit of Credit Card Arbitration
Credit card arbitration costs creditors far more in fees than if they were to go to court. So if you have a choice, and elect arbitration, it is possible that the creditor will simply walk away from collection of the debt. Or, at the very least, it could give you negotiating power in pursuit of a settlement.
Benefit of Going to Court Instead of Arbitration
California is the only state that requires arbitration companies to publish the results of arbitration cases. So while by no means representative of the U.S. arbitration cases as a whole, it's important to note: the majority of arbitration cases find in favor of creditors. The decision is set in stone, unless you can prove fraud or a significant conflict of interest on the part of the arbitrator. On the contrary, the benefit of going to court is the opportunity to appeal the decision.
Choice of Arbitration
It's in your agreement with the creditor, so read it carefully. Note, there may be a number of agreements that have been issued between the date you opened the account to the date of default. Look for the agreement that references JAMS (Judicial Arbitration and Mediation Services, Inc.), as this option makes it more costly for the creditor to purse collection of the debt.
Once you have found an agreement that references JAMS, look next for a survivability clause within the same agreement. This is important, as newer versions of the agreement may have eliminated the JAMS reference. The survivability clause will read something like, "this agreement will survive any changes to the agreement in the future."
When is a Good Time to Elect Arbitration?
When you receive a collection letter, respond with a letter of dispute, requesting that the creditor validate the debt. At this time, you may also send in a letter electing arbitration.
Before writing your letter electing arbitration, look for a copy of the contractual agreement entered into between you and the creditor. Look in the dispute resolution part of the agreement for the provision on arbitration, particularly for the mention of JAMS. Make mention in the letter of this provision, and your election of arbitration via JAMS. Failure to make this specification could allow the creditor to initiate arbitration in AAA instead of JAMS, which is far better for the creditor than for you. Also, be sure to mention that, pursuant to the card member agreement, you are requesting the advance of fees to initiate arbitration.
Under some agreements, the creditor is required to advance or pay your arbitration fees. Make mention of this in the election of arbitration letter, quoting the relevant text from the agreement.
Note, do NOT send a copy of the agreement at this time. The longer you can keep the creditor from knowing which agreement you're referencing, the better.
Should You Elect Arbitration if the Statue of Limitations Has Expired?
Absolutely not. Every state has different statutes of limitations on different types of debt, so check the specifics of your state. If the statute of limitations has run out, you are no longer legally responsible for the debt.
What Happens After a Letter Requesting Debt Validation is Sent?
The creditor will either validate the debt, sell the debt to a third-party collector, or simply go away. If your debt is sold to a third-party, be sure to send them the same letters of dispute and election of arbitration. If the creditor sues you, but you included with your debt validation an election of arbitration, then the creditor is in violation. They do not have the right to sue you if elected arbitration first.
What Happens if the Creditor Validates the Account?
Send a letter stating that the matter remains in dispute and your election of arbitration via JAMS stands. This means if they try and sue you, they are in violation.
How to Respond to a Summons and Complaint
You will have a deadline for responding to the summons and complaint with your answer and affirmative defenses. At this time, you will also want to file your Motion to Compel arbitration. Note, in some states, you cannot file your answer before your election of arbitration notice; if you do so, you waive your right to arbitrate. Check for rules specific to your state.
States also differ in whether you need to file a brief or memorandum in support of your motion. Again, check rules specific to your state.
Before sending in your answer/affirmative defenses, take it to a notary. Only after you have signed in the notary's presence, and they have stamped it, should you file it with your court. Mail a copy to the creditor's attorney, via certified mail with return receipt, and make a copy for yourself. Note, copies of anything you file with the court must be sent to the creditor and their attorney. Be sure to mail these certified mail with return receipt. And, of course, keep copies for yourself.
Include a copy of the arbitration agreement with an affidavit. Highlight the arbitration provision. Mention that you have done so, citing the exact page number.
When you file, ask the clerk if you need to request a hearing for your motion. In some courts, there will be no decision on your motion, unless you have scheduled a hearing for it. Other courts will tell you that if it is needed, they will let you know.
What to Send to JAMS
Once you have received your return receipts proving the creditor's and their attorney's receipt of your election of arbitration, you may send the following documents to JAMS:
- The original JAMS demand you sent to the creditor and their attorney.
- One copy of the JAMS demand.
- Two copies of the complete agreement you entered into with the creditor (highlighting the arbitration provision).
- Proofs of service where you sent the JAMS demand to the creditor and their attorney.
- A cover letter.
How Much Are JAMS Arbitration Initiation Fees?
JAMS arbitration initiation fees are capped for consumers at $250. You may send in the entire $250, or send as little as $50, asking to make payments on the remainder of the fees. Note, under some agreements, the creditor will advance or pay your fees. In that case, you don't send in any money, but notify JAMS of such, quoting the relevant text from the agreement.
What to Do After Sending JAMS Copies and Fees
You wait. The creditor may walk away. They might dismiss with the stipulation that you initiate. They might do nothing and then you have to wait for the judge to decide if your MTC will be granted.
If it does move forward into arbitration and the initiation fees are paid, then the arbitration is commenced and you will have to file a formal complaint.
Difference Between JAMS and AAA
Both JAMS and AAA are arbitration services. JAMS (Judicial Arbitration and Mediation Services) is preferable to AAA (American Arbitration Association), as JAMS is most costly to creditors (i.e., increasing the chances they will drop further action). So if you have a choice, elect arbitration via JAMS.
Can the Creditor Initiates Arbitration in AAA After Already Initiated in JAMS?
File a Motion to Clarify, with which you can state that you initiated arbitration in JAMS before the creditor initiated in AAA. When you do so, it's a good idea to also request a hearing on the motion.
When Should You Provide a Copy of the Credit Card Agreement?
Only when you file your MTC arbitration with the court must you attach a copy of the agreement. At this time, you would also send a copy of the agreement (and MTC) to the creditor and their attorney as well. Sending the agreement any sooner will be doing yourself a disservice. The longer you can keep the creditor from knowing which agreement you have up your sleeve, the stronger your position.
If Dealing with a Junk Debt Buyer, Do You Still Need to Send Copies of Everything to the Original Creditor?
No. When a junk debt buyer buys a credit card account, they step into the shoes of the original creditor. So anything referencing the need for you to send copies to the original creditor should be taken to mean the current owner of the debt (i.e., the junk debt buyer).
What is a Motion to Compel (MTC)?
To initiate arbitration, you do so through a Motion to Compel (MTC) that you file with the court, which should accompany your answer/affirmative defenses for the summons/complaint. As with anything else filed with the court, be sure to send a copy of the MTC to the creditor and their attorney.
What is a Motion for Summary Judgment (MSJ)?
A Motion for Summary Judgment (MSJ) is the creditor's request to be awarded the judgment. You need to file an opposition to the MSJ. In it, make sure to point out that you elected arbitration and that you filed your MTC with the court.
What if the Judge Rules that Arbitration is Not an Option For You?
If you have a hearing scheduled before the judge rules, be sure to point out the arbitration option and survivability clause in your agreement. If the judge rules without a hearing, and your MTC arbitration is denied, you may file a Motion to Reconsider (MTR), in which you will point out the relevant language in the agreement.
What if the Creditor Offers to Settle?
This is a definite possibility, as the arbitration process is an expensive one for creditors. Use your negotiating power and aim for a settlement the terms of which you can afford to meet. See our comprehensive collection of articles on debt settlement strategy and steps.
How to File a Formal Complaint if the Arbitration Moves Forward
If arbitration does move forward, with the creditor paying their part of the fees, then arbitration is commenced. From that point, you will need to file your formal complaint within 7 days, unless yours is a case with comprehensive rules (claims over $250,000), in which case you have 14 days.
Your formal complaint details your claims and looks a lot like a court pleading with you as the Claimant and the creditor as the Respondent.
To come up with a list of complaints, familiarize yourself with your state's laws, consumer protection laws, fair business practices act, deceptive trade practices, anything that might could be used in addition to possible FDCPA, FCRA, TCPA, Fraud & Misrepresentation, Breach of Contract, and possibly even physical and emotional distress.
What is a Forum or a Provider?
The forum, also known as the provider, is an impartial point of contact among all parties involved in the arbitration, including you, the creditor, the creditor's attorney, and the arbitrator.
What is the Arbitrator Strike List?
You will receive a list of possible arbitrators — usually three to five of them — which you are asked to order according to your preference, though you are allowed to strike one out completely. To make an informed decision, do an online search of each possible arbitrator. Note, try and stay away from ex-bankruptcy judges or anyone tied to the banking industry. Also, try to find out how many times each arbitrator has worked with the creditor. The longer their history together, the less desirable that arbitrator is for you.
If you happen to see the creditor's strike list before you submit your own, be sure to strike out on your own list the arbitrator who is the creditor's first choice. It's important to meet your deadline date, but hold off as long as possible before submitting your strike list. The goal is to give the creditor as little time as possible to strike from their list your top choice.
What Happens if the Arbitrator Finds in Favor of the Creditor?
If the arbitrator finds in favor of the creditor, the creditor must receive a judge's confirmation of the award before they can collect on the debt. Once confirmed, you can expect the creditor to enforce collection measures, which could include garnishment from your paycheck or bank account. Your only alternative option at this time is to dispute the decision if you suspect fraud or conflict of interest on the part of the arbitrator.
What Happens if the Arbitrator Finds in Your Favor?
Celebrate! You won the dispute, forcing the creditor to cease all collection efforts.
Please note: WE ARE NOT ATTORNEYS. If you are being sued, it's always a good idea to hire an attorney or get some legal assistance. If you cannot afford an attorney, a lot of people have handled their cases pro per or without a lawyer. Our articles are meant to provide basic information on handling litigation.
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