Debt Settlement versus Arbitration

Credit card arbitration is going away, much to the benefit of card holders. The latest blow to arbitration came Sunday, when Minnesota Attorney General Lori Swanson announced that the state had settled with the National Arbitration Forum (NAF), which administers arbitrations as put forth in standard customer agreements with issuers. Swanson had sued the St. Louis-based company a week earlier for what she said was its unfair handling of debt disputes. “This is an issue beyond any one problem company,” said Swanson. “It is a systemic industry wide problem. Consumers are giving away rights without even knowing it.” Seemingly trying to avoid the microscope that the National Arbitration Forum had been under, The American Arbitration Association said on Tuesday it will voluntarily stop participating in credit card related arbitrations until new guidelines are established.

The lawsuit accused the NAF of violating state consumer fraud, deceptive trade practices and false advertising laws by hiding financial ties to collection agencies and credit card companies. Most people that have signed a credit card agreement never realized that they were giving up the right to sue the credit card company when they feel that they had been wronged by the issuer. The other unknown aspect of the arbitration clause was that the members of the panel that would hear the case would be in the pocket of the credit card companies, selected for previous rulings in favor of credit card issuers.

The Obama Administration, having already signed the Credit CARD Act in May which regulates abusive credit card practices, recently proposed a ban on arbitration agreements in credit card agreements in their effort to expand customer protections. The credit card industry, already preparing for regulations of the Act which start its first phases in August, finds itself now on the defensive on another front, one which has provided consistently favorable rulings, allowed it to aggressively go after unpaid debts, and shielded it from class action lawsuits.

The value of the arbitration clause to credit card industry is undeniable, and is likely to be defended vigorously despite the exit of its two biggest arbitration firms. “Arbitration is a valuable way for consumers and businesses to resolve disputes in a very low cost and fair manner. Take it away and consumers will suffer,” said Kenneth Clayton of the American Bankers Association. Finding those customers that will suffer without arbitration may be difficult as the proceedings were stacked against card holders from the beginning. In her statement about the NAF settlement Swanson said: “To consumers, the company said it was impartial, but behind the scenes, it worked alongside credit card companies to get them to put unfair arbitration clauses in the fine print of their contracts and to appoint the Forum as the arbitrator. Now the company is out of this business.”

Further evidence of stacking the deck was found in a study by Public Citizen which revealed that credit card companies tracked arbitrators’ rulings and would not allow the arbitrators who ruled against them to sit on panels which involved the issuer. Public Citizen’s study also found that “Among cases with an arbitrator appointed by the National Arbitration Forum, 94 percent resulted in decisions in favor of the business.”

The end of mandatory arbitration throws a curve at the credit card industry at a time when it is facing challenges from all sides. It wasn’t long ago that if a card holder fell behind on payments, the only option was to seek credit counseling which was done on a nonprofit basis but clandestinely sponsored by the credit card companies. If credit counseling didn’t provide the desired results for the card issuers, the card holder would then be mandated to go to an arbitration which was also controlled by the credit card companies.

Now, with options like debt settlement, consumers have a much better chance at receiving an outcome that goes in their favor. Debt settlement, also known as debt negotiation, is a relatively new form of relief in which the process gets as many concessions for the card holder as possible. It is an adversarial negotiation where a law firm negotiates on the card holder’s behalf against the credit card issuers as opposed to the usual method of dealing with a system that was charged with carrying out the issuers’ agenda.

Card holders entering a debt settlement immediate see a reduction of approximately 50% on their monthly payment obligations for accounts that are being settled. In addition to credit cards, accounts that can be packaged into a debt settlement are; medical bills, unpaid utility bills, signature loans, and many other forms of unsecured debt. The settlement process then aims for full payoff of participating accounts with balance reductions ranging from 40 to 60%. The payoff schedule is then tailored to the card holders’ current financial situation with payoff times ranging in length from 18 to 48 months. Once the reduced balances have been met the participating accounts are considered to be paid in full.

According to information contained in the lawsuit against NAF, there were 214,000 arbitrations in which they participated in 2006. 94% of the card holders in those cases undoubtedly spent time and money to ultimately get a decision that was unfavorable to them. With the elimination of arbitration, it’s uncertain now how issuers will attack struggling credit card holders but with their political clout and resources they will likely find a way. The good news for struggling card holders is that with a firm negotiating their debt settlement, they can protect themselves as well.