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Credit card arbitration: What it is, how it works

About half of cardholders are barred from court in a dispute

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If you're like many Americans, you've given up the right to sue in the event of a dispute with your credit card company. As of December 2013, about half of credit card balances are subject to requirements that disputes be resolved via arbitration, an alternative to the court system with streamlined procedures and fewer protections for participants.

Credit card arbitration

Arbitration is frequently used by employers and service providers such as phone companies, as well as by banks and card issuers. The process involves a neutral third party, often a retired judge, who hears arguments from both sides and issues a decision. The decision is enforceable in court, meaning it may be used to garnish wages or seize assets.

Since 2009, credit card issuers have mostly shifted their cases to two arbitration groups, the American Arbitration Association and JAMS The Resolution Experts, formerly called Judicial Arbitration and Mediation Services Inc.  Both organizations require special protections for consumers -- such as capped filing fees -- as part of their process.

Outside of the banking arena, financial services such as payday lenders and debt settlement companies generally use other arbitration forums.

"Less-reputable businesses make the consumer travel long distances or have loser-pays provisions," said Paul Bland, senior attorney at Public Justice. Under loser-pays, the consumer could be liable for all hearing fees and filing fees, creating a chilling effect on the filing of a claim.

Credit cards that require arbitration generally make two important exemptions: Debt collection actions, and disputes small enough to be heard in small claims court in the jurisdiction where you live. Consumer debt collection "was a problematic caseload," said Richard Naimark, senior vice president of the American Arbitration Association. The organization dropped collection cases in 2009.

Pre-dispute arbitration requirements say that either side -- you or the card company -- can require a dispute to be heard through arbitration instead of court. Here are answers to common questions about arbitration, based on card agreements and materials published by AAA and JAMS, as well as interviews with legal experts and arbitration services.

Does my card require arbitration?
Among major, general purpose card issuers, Chase, Bank of America and Capital One have dropped arbitration requirements. American Express and Discover require arbitration but have an opt-out clause for new customers, providing they write a letter to the company within about a month after receiving or using the card. Wells Fargo, U.S. Bank and Barclays require arbitration. Most store cards require arbitration, while most credit unions do not. To make sure, ask your card issuer for a current copy of your card agreement. Template agreements at the U.S. Consumer Financial Protection Bureau's database are also available; however, the database carries a disclaimer that individuals are governed by their specific agreement.

How does it work?
Disagreements that can't be solved through discussion between the card holder and the company are candidates for arbitration. The process begins when you or the company files a claim form with the arbitrator, sending a copy to the other side. Check the website of JAMS or the AAA for forms and instructions. Depending on the circumstances, there may be an in-person hearing, a hearing by telephone, or the arbitrator may decide the case by looking at written submissions and supporting documents, without a hearing. 

What does it cost?
Companies pay filing fees if they launch the claim. If the consumer initiates the claim, filing fees are capped at $200 under AAA and $250 under JAMS, and the company must pick up the subsequent arbitrator's fees. Check your card agreement to find out whether the company will subsidize fees you pay. Most will pay at least the portion of filing fees above what a court filing would cost. Some will advance you funds to cover costs such as expert witnesses, and will pick up attorney fees if you win the case. Other card agreements state that each party will pay their own costs regardless of the outcome.

How long does it take?
AAA said document-only cases finished in about four months, while cases involving in-person hearings took about six months, based on a study of cases heard in 2007. Forty-one percent of consumer arbitrations were documents-only.

Where are hearings held?
JAMS requires that consumers have a right to a hearing in their hometown area. The AAA requires the location to be "reasonably convenient" to both sides. The arbitrator can decide the location if the parties cannot agree. Several card agreements give you the right to a hearing in the federal judicial district where you live.

How is arbitration different from court?
In court, rules of evidence govern the process, and people who feel they were wronged can compel corporations to provide copies of confidential documents. Cases may be heard by a jury, and decisions can be appealed to a higher court. In arbitration, the arbitrator has more latitude to decide what evidence to consider, and may not be bound by consumer protection law. Decisions are generally not open to appeal, although some card agreements provide for a review by a panel of arbitrators. Consumers can represent themselves or hire an attorney, although relatively few lawyers will take arbitration cases.

Related story: CFPB report: Biggest card issuers push consumers into arbitration

Updated: December 24, 2013


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