Post-Bankruptcy Survival: Beware Of Mandatory Arbitration Clauses

What Are Mandatory Arbitration Clauses?

More credit card companies and other lenders are adding mandatory arbitration clauses to their contracts and agreements with debtors. A mandatory arbitration clause basically says that both parties are prohibited from seeking judicial relief if a conflict arises and all disputes must be decided in arbitration. Sounds fair? Well it may sound fair if you’re a big time credit card company with money to throw behind the arbitration firms and arbitrators who serve them.  For those debtors exiting bankruptcy and trying to repair their post-bankruptcy credit record, it is important to understand what mandatory arbitration could mean for their finances.

Let’s take a look at a few facts:

  1. While mandatory arbitration sounds like it can save you some money on attorney fees, arbitrators still need to get paid. Some arbitrators charge just as much as attorneys.  But don’t worry, most likely the creditor will be paying the bills; but you know what they say – the one who pays the cost is the boss.
  2. The vast majority of arbitration cases are decided in the favor of the business not the individual debtor. A study done in 2007 found that one arbitration firm decided 94 percent of their cases in favor of the business. That doesn’t sound good for the debtor who is challenging a creditor after bankruptcy.
  3. Much of the arbitration decisions are binding. If the post-bankruptcy debtor is in disagreement with the decision of the arbitrator, they are bound by the agreement and don’t have the right to appeal. This is a huge problem and some say is really a denial of due process.

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