This guest post was written by Bob Brooks, host of the Prudent Money Radio Show and President of Prudent Money Financial Services. For more information please visit www.prudentmoney.com.
About a year ago, I wrote that things might really start to change in the process of how credit card companies go after consumers who have defaulted on their accounts.
Let’s first review how credit card companies go about the debt collection process. There are 2 different ways for a credit card company to collect defaulted debt. First, they can go about it the traditional way of being persistent and going through the debt collection process. If the consumer still doesn’t pay, they either give up and assign it to a third party debt collector, or write if off and sell it to a third party debt collector. Their second avenue of collecting defaulted debt is through legal means for the purpose of seeking a judgment against the consumer. Once they have the judgment, the debt collector or original creditor has other avenues of collection available to them.
For the consumer, this is the one thing you want to avoid. They can go about getting a judgment through the filing of a lawsuit or through the arbitration process.
Arbitration is a totally different process than going through a lawsuit. There are no official papers served to the consumer. A letter is sent to the consumer alerting them that the arbitration process has been started against them. They are asked to respond to the letter. The vast majority of time, the consumer doesn’t even show up for the arbitration proceedings.
Arbitration is credit card industry friendly and is a process that always stacks the cards against the consumer.
The consumer doesn’t show up, they lose the arbitration, and then the debt collector or creditor is awarded a judgment through a court of law.
The two largest arbitration associations in the country are National Arbitration Forum (NAF) and the American Arbitration Association (AAA). Last year, the NAF had a lawsuit filed against them for their secret association with a large debt collection firm. Apparently, the arbitration association and the debt collector owned a hedge fund and they were filing arbitration proceedings against consumers right and left. Both parties were owned by the same company. There was no impartiality at all. It was a consumer scam.
As a result, the NAF stated they will no longer participate in consumer based arbitrations. In addition to the NAF dropping out of the credit card collection game, the second largest association dropped out of the debt collection arbitration business as well. This takes away two of the biggest players available to debt collectors, which is a huge victory for consumers. This makes it tougher for debt collectors to collect through legal means unless they want to file lawsuits.
About the same time, Bank of America announced that they would stop using arbitration to settle defaulted credit card accounts with consumers. This past week, they made that official by sending out a letter that they are dropping the arbitration clause from their credit card contracts. The striking of that language from credit card contracts and elimination of this anti-consumer process is a big victory for credit card holders. This also gives the consumer the ability to sue the credit card company where the mandatory arbitration clause removed that ability. With a major player like Bank of America taking this step, other credit card companies should follow suit.