By: Patrick Ouellette, ALR Senior Editor, 2021
Based on the ever-increasing popularity of the arbitration in the American legal system, more and more contracts are being written to include mandatory arbitration agreements. This has come to include many lender agreements, in both commercial and consumer debt. Since these contracts are including arbitration agreements, it is important to examine the effect that arbitration can have on the debt collection industry.
Debt collection can include either a debt between the original borrower and the original lender, or an obligation between the original borrower and a third party that has purchased the right to the debt from the original borrower. The third party assumes the debt that the borrower owes, and, as such, is governed by the terms of the original contract. This means that if the original contract has a mandatory arbitration agreement, the third party must arbitrate its claims. Arbitration is used in debt collection when a borrower falls behind on the required payments. An arbitrator will hear the facts of the case, render a decision, and then a court will confirm the decision of the arbitrator.[1] An arbitrator’s decision can lead to such actions as garnishment of wages of a delinquent borrower.[2]
Although the arbitration cases can seem like an open and shut case for the lender, arbitration can actually be used as a defense for a borrower who is looking for options to lower their payments.[3] As it was mentioned earlier in this post, the arbitration agreements in most contracts are mandatory. This means that the borrower can force the lender to arbitrate the late payments. Most arbitration agreements cap the amount of the arbitrator’s fees that the borrower has to pay at $250, with the lending party forced to cover the rest of the expenses.[4] If the expenses are such that trying the case in front of the arbitrator would be unprofitable, the lender may just forgive the expense rather than trying to collect. Additionally, the borrowing party may decide to represent themselves pro se, which is much cheaper than hiring an attorney to represent them, which the lending party must do based on the volume of claims they must litigate. This allows for the borrowing party to drag on the proceeding to run up the costs of the arbitration, to further make it unprofitable to collect.
Even with the possibility that the borrower can manipulate the system, arbitration is still a positive in debt collection. Arbitration can lead to a reduced price for the borrower, and a satisfactory outcome for the lender when compared to not getting paid at all.
[1] Bill Fay, Debt Arbitration & Negotiation Services, Debt.org, (May 31, 2018) https://www.debt.org/credit/collection-agencies/arbitration/
[2] Id.
[3] Turning the Tables on Debt Buyers—Using Arbitration as a Defense to a Collection Lawsuit, Credit Defense Attorneys, (May 1, 2017) https://www.creditdefenseky.com/2017/05/01/turning-tables-debt-buyers-using-arbitration-defense-collection-lawsuit/
[4] Id.