Credit Cards and Arbitration Clauses

A very troubling trend that potentially affects millions of Americas is going unnoticed. Don't make the mistake too many people make when it comes to arbitration. There's a good chance that you have conceded to arbitration already, probably unwittingly. That's because more and more of the big companies that touch our lives on a daily basis, such as software developers, banks, web based services and of course, credit card companies, are writing arbitration clauses into their terms.

You know about those, right? The masses of tiny print below the box you check so you can get to the download screen, or the pages and pages of tiny print that accompany your shiny new credit card? Did you read them carefully? Probably not! Who has the time, legal expertise or eyesight for that? Not many consumers―big companies are counting on it.

Arbitration is an alternative form of dispute resolution, and it is often touted by its supporters as a welcome alternative to an over-clogged court system.

Don't buy the hype; arbitration appeals to big companies because it allows them to call the shots. Instead of resolving disputes before the courts, which balance the needs and interests of all parties, arbitration allows one party to a contractual relationship to potentially take a decisive advantage. (Kudos to you if you guessed that it's the party that writes the contract.)

A common example concerns what's called forum selection; ordinarily, if you have a dispute with someone, the place where the dispute will be settled legally must have some connection to the parties at odds or the disputed events. Arbitration and forum selection clauses allow companies to select the forum―and it's not going to be your local courthouse. If you don't respond to an arbitration notice or attend the meeting, which could be thousands of miles away, the company essentially wins by default.

And it gets worse: the courts have consistently enforced arbitration judgments. When you accept the terms of a contract with an arbitration clause, which you do when you activate your credit card, install a computer program or even open the box it comes in, you agree to be bound by the findings and judgments of the arbitrator.

Why would courts enforce such seemingly unfair provisions? The answer is that the "freedom to contract" means that two parties to a contract are presumed to be walking in with open eyes and equal bargaining power.

This is absurd, of course. Usually a consumer has much less bargaining power than a big company with a legal department and a near monopoly on the market.

Many credit card companies are now working with an organization called National Arbitration Forum instead of going through the court system. Settling through arbitration allows these companies to get expedited judgments against consumers, often totally unchallenged.

If you get a notice of an arbitration proceeding against you, DO NOT ignore it. Read the notice very carefully and make sure that they are not claiming a bigger debt than you owe them. Study the stipulated procedures for disputing claims. In addition, require that they prove even those debts that you believe to be accurate.

If you're already working with a bankruptcy lawyer, show him or her the arbitration notice so your attorney can help you understand your options. Make sure to dig up any notices you received and ignored in the past; these can affect your bankruptcy proceedings.

And in the future, watch out for arbitration clauses in contracts; if you are choosing between two companies that are in all other aspects equal, treat an arbitration clause as a deal breaker.