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Consumer advocates slam credit-card arbitration

They charge the deck is tilted in favor of banks in disputes with credit-card holders.

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But two former NAF arbitrators say banks took them off of cases after they issued rulings unfavorable to the institution. Richard Neely, a retired chief justice of the West Virginia Supreme Court, says he received two cases from the NAF in which he wouldn't charge consumers for the creditor's litigation-related fees. He never received another case.

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After she decided against a credit-card company, awarding a consumer damages, Elizabeth Bartholet, a former NAF arbitrator and Harvard law professor, said in a 2006 deposition that she was repeatedly removed from cases by the credit-card company. Rather than telling alleged debtors that the creditors removed her, she said, at times NAF mailed letters saying she had a scheduling conflict and had withdrawn.

Courts may be more understanding of consumers who don't understand the system. Unlike NAF, many small-claims courts may be willing to reopen a case after a consumer mistakenly doesn't appear at a hearing. "Most judges are very forgiving if you come in and say 'I have no idea what's going on,' " says Richard Rubin, a New Mexico federal consumer appellate law specialist and chair emeritus of the National Association of Consumer Advocates.

Beltran says his debt stemmed from funeral expenses for his brother, not from any credit card. But at one point the debt buyer that went to court to enforce the arbitration award used a credit card agreement form to prove Beltran had agreed to arbitration. The contract Beltran signed, he says, had been negotiated in Spanish, but he was given only an English contract – illegal under California law – that contained terms he says he never discussed, including a 26.99 percent interest rate. After receiving notice of a court hearing to confirm the arbitration award, Beltran hired a lawyer. Earlier this month, Beltran settled his dispute. The debt has been discharged and his credit rating will be restored.

What to do if arbitration looms

If you find yourself in a credit-card dispute, here are some steps you might consider:

Read your mail and respond to it quickly. If you get a certified letter from an arbitration group, read it carefully. The charge may be wrong, or the creditor may have bought the debt from someone else. Even if you don't recognize the creditor, respond right away. Arbitration deadlines are strict.

Get your credit report. Credit reports can be requested free online once a year at www.annualcreditreport.com. If your report contains errors, deal with them promptly before your arbitration case is heard. But don't worry about your credit score, says Paul Bland, staff attorney at Public Justice. Lenders often have their own ways to determine creditworthiness based on your report, he says, so your score may be of limited value.

Consider hiring a lawyer. An attorney for either a court or an arbitration case may cost more than it's worth if the debt is only a few thousand dollars. But "people who don't have a lawyer won't know some of the basic things to contest," such as whether or not a debt has passed its statute of limitations, says Mr. Bland.

Learn about the arbitrator. Depending on who makes the claim against you, you may have the right to object to the arbitrator assigned. Consider striking any arbitrator who's a "creditors' rights" attorney.

Try to settle. Neither arbitration nor litigation is cheap. A debtor may have to pay thousands of dollars in attorney's fees tacked on by the creditor. So if you owe the money and the debt isn't old, negotiate with the collection agency or debt buyer. They probably bought your debt at a greatly reduced rate and may agree to a reduced payment.

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