Turning the Tables on Debt Buyers—Using Arbitration as a Defense to a Collection Lawsuit

Arbitration clauses in consumer contracts are the result of legal evil geniuses’ perversion of the law to defeat consumer rights, to avoid litigation, and to prevent culpable companies from being held liable for damages on a class-wide basis. Courts unfortunately have sanctified this perversion making consumers all across worse off and more vulnerable to harm from corporations, big finance, and big business. This article suggests how an individual consumer like you can use this legal perversion to her advantage as a defense to a lawsuit filed by a debt buyer.[1]

Most debt-buyer[2] lawsuits are attempts to collect charged-off credit card debts. In turn, most of the underlying credit card agreements in these lawsuits contain mandatory arbitration clauses. These are the agreements that you can use against the debt buyers to compel the debt buyer to arbitrate its claim against you. But before getting to the mechanics of compelling arbitration, you may ask why arbitrate?

I.     Why Arbitrate?

There are several very good reasons to want to take your debt-collection to arbitration:

1. Arbitration greatly increases the cost of collection for debt buyers.
2. Arbitration is informal process, allowing you to more easily represent yourself.
3. Debt buyer counsel is not familiar to the arbitrators.
4. An arbitration award does not appear in the public-record section of your credit report.   

1.      Increasing Cost of Collection

Bringing a debt-collection lawsuit in Kentucky is cheap and ridiculously effective. Typically, the costs for filing a collection lawsuit in a Kentucky District Court is $125.00 or less and filing a collection lawsuit in a Kentucky Circuit Court is $150.00 or less.[3] In something like 95% of these cases, the defendant never appears and the debt collector is able to get a default judgment against the consumer with no additional court costs. But not so in arbitration.

An arbitration is carried out by a private arbitrator. Under most credit card arbitration agreements, the debt buyer has to pay all of the arbitration fees, which can run from $2,000.00 to $4,000.00. Moreover, unlike in a court case, the debt buyer cannot recover its court costs in the arbitration award. So in an arbitration, the debt buyer has to pay much more and cannot shift these costs to the consumer. Many times, the debt buyer will do the math and elect not to pursue the arbitration based on a simple cost-benefit analysis.

Additionally, the increased costs of arbitration gives you the consumer a great deal of leverage should you wish to settle the debt.[4] That is, the debt buyer, or debt-buyer’s counsel, will be much more open to reasonable settlement offers. If you do settle, there are two things you must make conditions of the settlement: do not sign an agreed judgment and require the debt buyer to delete the trade line from your credit report.

2.      Informal Process

Taking a collection action out of the court system is HUGE advantage for most collection defendants.

First of all, the arbitration process is not subject to court rules of procedure or evidence. Debt collectors use the legal system to their utmost advantage by using their knowledge of court rules to intimidate and roll over consumers who have no knowledge or experience with these rules. In particular, debt collectors use discovery to trap defendants into inadvertently admitting liability and summary procedures to deny the defendant his day in court. The debt buyer loses all those advantages in an arbitration. Instead of rules and procedures, each side gets to make his or her case to the arbitrator in an informal proceeding, usually a telephonic conference.

3.      No Familiarity with Arbitrators

 Counsel for debt collectors appear in the court system in front of the same judges day after day. Judges and debt collection counsel know each other and often friendly. This is not meant to impugn the integrity of judges, but familiarity does breed bias in the debt-buyer’s counsel’s favor, especially in the absence of a defense or against unknown, unrepresented consumer. Debt buyers lose this advantage in an arbitration. The arbitrators are randomly selected. Further, because debt buyers arbitrate so few cases the opportunity for such familiarity simply does not arise.

4.      No Public Record

In an arbitration, the debt buyer loses the ability to turn its junk debt into a super debt. Debt buyers bring suit for purposes of obtaining a default judgment against the consumer. Judgments are super debts, subject to a long statute of limitations, and which allow the debt buyer to use the force of government to seize your assets.

The statute of limitations for a judgment is ten years under Kentucky law. But the debt collector can easily reset the limitation period by making any attempt to execute on the judgment. So for intents and purposes there is no statute of limitations on judgments in Kentucky.

And armed with a judgment, a debt buyer can garnish 25% of your wages and wipe out your bank accounts. A debt buyer can also file a judgment lien that attaches to any real property you own. This makes selling or buying any property problematic.

Finally, a judgment appears on the public-record section of your credit report. This can result in a reduction in your credit score of 40-60 points. But an arbitration award against you does not appear on your credit report. One word of caution, a successful claimant in an arbitration case can reduce the award to a judgment. Of course, you have the right to pay or settle an arbitration award before it is reduced to judgment.

II.     Compelling Arbitration

Moving to compel arbitration occurs inside the debt-collection lawsuit. So you it requires the use of court rules of procedure and evidence. I am very familiar with this process and have been successful in moving to compel arbitration in several cases. I can represent you and bring the motion on your behalf for a very reasonable fee. I can also draft the motion for you to file and argue yourself for even less.

If you’ve been sued by a debt collector, please  call or email me today.

           

[1] Disclaimer: This article is not intended to provide legal advice. The information contained herein (legaleze so that you know I’m serious) is for informational purposes only.

[2] There are several active debt buyers in Kentucky that regularly file suit to collect debts, including: Midland Funding, LLC; Portfolio Recovery, LLC; Calvary SPV I, LLC; and LVNV Funding, LLC.

[3] These costs are so cheap because public tax dollars subsidize and fund the court system.

[4] The two main reasons you may want to settle the debt are to (1) pay your debts, and (2) clean up your credit report.