The Credit Industry’s Secret Weapon to Collecting Debt…and You Agreed to It

With credit card debt rising to a record high of $957 billion in the first quarter of this year, credit card companies and debt collectors are getting very aggressive in collecting delinquent debts. They have a method of going through the legal process that has a success rate of 99%. It is reported that in 93% of the cases that are awarded, the debtor didn’t respond or even participate.

Well, it is the industry’s chief debt collecting weapon called arbitration. The worst part is that consumers agree to it in the majority of credit applications that are signed. The fine print states that all disputes are settled through arbitration.

Arbitration was intended to be a fair and balanced way to handle a dispute. However, you take an epic problem such as delinquent debt and throw in arbitration fees to collect that debt and you get arbitration firms that cater to the credit card industry. In Business Week, an article alleges that one of the country’s largest arbitration firms, National Arbitration Forum or NAF, sets up an arbitration service that is completely one-sided and favors the credit card industry. The system caters so much to the credit card industry that big banks such as Chase exclusively use NAF to arbitrate their cases. In fact, it is in the fine print.

Allegedly the system is designed to put very little time and research into the cases and arranged to where they just side in favor with the creditor. The amount is rarely researched for accuracy. The consumer doesn’t even have a chance.

The process is very simple. A notice of arbitration is sent in the mail. The letter says that the consumer has 30 days to respond. Reportedly 93.7% of the cases are decided without the consumers ever responding. 0.3% of consumers actually ask for a hearing. Only 6% participate by mail.

To make matters worse, the consumer has to get on a plane and fly to the arbitration hearings just to participate. Of course, this makes it even more difficult for the consumer to defend their case.

A current NAF arbitrator told Business Week that “there doesn’t have to have to be much due diligence put in the complaint. If there is no response, you are golden. If you get a problematic case, you dismiss it.”

It comes with no fanfare and most consumers don’t realize the significance of it. It comes in a non-descript, straight-forward letter that states the process has been started. It probably would not create the same reaction as being served a lawsuit. Thus, often times they are disregarded. However, that is a huge mistake. The consequences of arbitration are no different than those of a lawsuit procedure.

The objective for both arbitration and a lawsuit are the same. It is to seek a judgment. Once that is accomplished, then they have you for a very long time. Legally, they can pursue this debt for up to 20 years. The judgment also affords them more aggressive methods in collecting the debt.

This is why it is critical to keep debts current no matter what. Once a debt defaults and goes to collections, you have created a much longer term problem.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.