What is Debt Arbitration and How Does it work?

Posted on June 10, 2021 in Debt

Nothing feels as bad as crushing, relentless debt.  Being hassled by creditors is only part of it.  Debt casts a pall over a person’s life.  Every decision, every action, in fact every relationship is affected by debt.  Debt has ended marriages, destroyed friendships. It has lost people their job, and in extreme cases, their lives. Debt arbitration offers a way out.

There are real world solutions to debt.  Payment of course is the first and best option, while partial payment comes burdened with pitfalls and dead ends.  Debt arbitration provides a glimmer of hope, however.  Sometimes called debt settlement or negotiation, this method of debt relief allows creditors and debtors to come to an agreement.  Like other alternatives it is still a perilous course, not to be taken lightly and certainly not to be entered into alone. 

What Is Debt Arbitration?

Quite simply, debt arbitration is when the original creditor and the consumer enter into a structured negotiation to settle the debt for a lesser amount.  It is arbitrated by a third party, who may work for either the consumer or the creditor.  The debt arbitration case proceedings themselves may be initiated by either the consumer or the creditors.  Both parties agree from the start to abide by the arbiter’s decision.  Understandably the outcome is usually one where neither party gets everything they want.  Similar to debt mediation, debt arbitration usually comes after creditors have already made several efforts to collect the debt.  On the consumer side the debt has usually escalated due to sudden loss of income or irreversibly disastrous financial decisions.

How Does Debt Arbitration Work?

Debt arbitration can be initiated by the consumer or the creditors.  It can also be started by court order or by referral agencies.  A unique characteristic of initiating debt arbitration is that creditors will only begin the process by alerting the creditor by mail.  At that stage there are no texts, emails or phone calls.  Once the creditor and debtor are in contact, they choose an accredited arbitrator whose job is to come to the fairest decision possible. The arbiter must remain neutral.  Usually both creditor and consumer are represented in the proceedings by council. 

All the debts of the case are presented.  Payment schedules and amounts are determined.  The debtor most likely isn’t paying the creditors directly at that time, but is instead putting money into an escrow account administered by the arbitrator.  Once an agreement is reached, payment disperses from that escrow account.  If the account doesn’t have enough money to cover the agreed upon amount, arrangements are made for the debtor to add to the account to keep up with the payments. 

How Do You Go About Hiring A Debt Arbitrator?

An arbitrator should be a company or individual certified by the American Fair Credit Council (AFCC). 

Arbitrators can be attorneys or other professionals.  They can even be counselors from non-profit credit services.  Quite often consumers will be in contact with such individuals long before the debt arbitration process officially begins. This is actually preferable, since getting to the arbitration stage is best done after a great deal of professional legal advice and guidance.  No matter how the arbitrator is chosen, care must be taken to be sure they are up to the task.  They must be not only a good provider of services, but be able to offer a secure venue and handle communications during the arbitration process.  Two of the more well know arbitration groups are American Arbitration Association (AAA) and JAMS The Resolution Experts (JAM).  Both have good facilities, reasonable filing fees, and great reputations. 

What Can You Expect From The Debt Arbitration Process?

If you’ve come to no reasonable way to settle the debt in question, then the arbitration process begins.  As stated earlier, all debts are considered.  A good arbitrator looks at the total picture.  They examine the consumer’s short-term and long-term debt.  They may have suggestions about how to bring down the debtor’s credit to debt ratio before making a decision. 

Debt arbitrations are governed by set rules known as protocols or procedures.  These rules also include debt arbitration clauses and address specific concerns such as costs, responsibilities, and deadlines.  The arbitrator will have them listed for everyone’s perusal.  Since the rules are strict and the outcomes severe, it is highly recommended that all parties have lawyers and other professionals representing them.  Even without council, no arbitration is free.  The expense is as real as the seriousness of the proceedings.  The costs and sober outcomes are stark reminders of why it’s best to have experienced hands guiding each participant to ensure a proper judgment. 

Make Sure To Keep All Your Records.

Have everything documented for the debt arbitration proceedings, preferably in writing.  Have all receipts, bank account records, credit reports and correspondences.  If anything is in question, it probably hurts your cause.  The bottom line will be based on provable facts.  The goal of the debt arbitration is to lower the consumer’s payment.  That’s very hard to do without records to back you up. 

What Are The Possible Outcomes Of Arbitration?

Once a judgment has been made, it must be certified by a court in order to be enforced.  Once in court, garnishment or other debt collecting procedures may be initiated.  It’s a near certainty the entire debt won’t be eliminated.  Certain aspects of it may be waived or forgiven, but there’s no guarantee of that result.  Most creditors allow some reduction, because they believe it’s better for them.  Though there’s minimal chance they’ll be paid nothing at all, they may worry that further proceedings will only lessen the consumer’s ability to pay. The Consumer Financial Protection Bureau (CFPB), and other entities, note that most arbitrations favor the lenders.  This is especially true of arbitrations initiated by consumers, or the ones where consumers choose to represent themselves.

Here Are Some Frequently Asked Questions (With Answers) About Debt Arbitration.

1).  What happens if you don’t pay arbitration?

If you don’t pay, the arbitration will be terminated.  You’ll be back where you started, probably with a lot fewer options.  

2).  What is arbitration on a credit card?

Credit card arbitration is a way to resolve the dispute between the credit card company and the consumer.  It is considered an alternative to debt collection, court or cancellation of a credit card agreement. 

3).  Who pays for arbitration costs?

Usually the arbitration agreement lists who pays the costs.  It’s usually understood that each party pays for its own representative or council, however. 

4).  How does an arbitrator make a decision?

The arbitrator listens to both parties (debtor and creditor).  They examine all the evidence, then render an impartial verdict, which must be submitted to a court to be enforced.  

What Are Some Good Debt Settlement Arbitration Programs?

 Here is a list of programs that have merit. The list is by no means exhaustive, but it provides a great starting point. 

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