Javier Beltran was shocked when an arbitrator ruled that he owed
$10,000 on a $2,500 loan. The money had helped him finance his
brother's funeral expenses. But after failing to repay the debt
promptly, Mr. Beltran had high interest charges, late fees, and
attorneys' fees tacked onto the bill.
When he signed the contract in 2000, Beltran was unaware that
he'd agreed to have a private third party settle any disputes. In
fact, when his case was heard, and the arbitrator ruled against him,
Mr. Beltran wasn't even there, nor did he have anyone representing
"I still do not know what arbitration is," said Beltran in a
Beltran's case is far from unique. In fact, if you own a credit
card, chances are you have a mandatory arbitration clause. What that
essentially means is that if you think the credit-card company has
charged you wrongly, you might not be fighting in court. Instead,
you may find your case brought before an arbitrator who works for a
private arbitration group, in many cases, it's a group chosen by the
The practice has become common over the past decade. A 2004
survey published by Law & Contemporary Problems found that mandatory
arbitration clauses covered more than two-thirds of finance-related
consumer contracts. And now, as more credit-card users end up in
arbitration, consumer advocates say that the arbitration process
makes it more difficult for consumers to dispute debts.
Complaints have recently caught the attention of Congress. On
Thursday, Sen. Russ Feingold (D) of Wisconsin and Rep. Hank Johnson
(D) of Georgia unveiled legislation that would prohibit predispute
mandatory arbitration clauses in consumer agreements, letting
consumers choose whether to go to arbitration or court if a dispute
"Arbitration can be a fair and efficient way to handle disputes,
but only when it is entered into knowingly and voluntarily by both
parties," Senator Feingold said in a release. "People from all walks
of life ... often find themselves strong-armed into mandatory
arbitration agreements. We need to make sure that all Americans can
still have their day in court."
In June, an oversight committee held
hearings on mandatory arbitration's fairness. "[W]hat was once a
choice has become a mandatory part of consumer contracts," said Rep.
Linda Sanchez (D) of California, chair of the House subcommittee
that held the hearing. "And despite all of the benefits of
arbitration, mandatory arbitration agreements may not always be in
the best interest of consumers."
Arbitration critics' concerns are myriad: Consumers may not
realize they've agreed to arbitration and aren't in a position to
negotiate contracts; unlike court hearings, arbitration hearings
aren't generally open to the public, and consumers may be less
likely to respond to a hearing notice from an arbitration group they
haven't heard of than to a court summons.
But at the heart of the controversy is the idea that arbitration
groups are dependent on the goodwill of repeat litigants - in this
case creditors - for business. The result, consumer advocates claim,
are incentives for arbitration groups to create rules that, though
neutral when taken at face value, may favor creditors.
Arbitration proponents say that hearings are fair and help
relieve caseloads of overburdened courts. They say the private
system is cheaper, faster, and more efficient than litigation for
consumers as well as business. Consumers, they say, have many
opportunities to dispute a creditor's claim - debtors are sent
notices via certified mail and can request a hearing in person or a
document hearing. Before a creditor can act to collect an award, a
court must confirm it.
Despite advocates' concerns, it's unclear whether consumers who
go through arbitration are any more likely to get a judgment against
them than those who go to court. …