Arbitration

Arbitration Definition and Meaning

Arbitration is an option for resolving disputes between two or more parties without involving the courts. Contracts can include arbitration clauses that either require both parties to agree to arbitration when there's a dispute, or make it voluntary if one party would prefer to avoid a lawsuit.  

Arbitrators hear facts and arguments from both parties involved in the dispute, then issue a decision. If the arbitration is binding, neither side can challenge the final decision. If it's non-binding, then either side could opt to move ahead with a lawsuit.

Debts may be resolved through arbitration if the debt contract includes an arbitration clause. If it doesn't or if arbitration is voluntary, the creditor may choose to sue, or the debtor could seek a settlement of the balance owed. 

More on Arbitration

If you find yourself getting behind on your debts, your creditors will eventually try to contact you about repayment. If you don't reach some sort of arrangement to make up the past-due amount, creditors may file a lawsuit against you. Or they may begin an arbitration proceeding. Arbitration is a less-formal way to resolve disputes, including ones that involve unpaid debts, outside of court. 

Here's how arbitration works for debt disputes. 

Arbitration: A Comprehensive Breakdown

Arbitration is an alternative to a lawsuit when two or more parties have a disagreement they can't work out on their own. An arbitrator or a panel of arbitrators weighs all the facts, then decides how the dispute should be handled. 

Contracts can include arbitration clauses that spell out what rights each party has. These clauses can also specify whether arbitration is voluntary or mandatory, and binding or non-binding. Here's what those terms mean:

• Voluntary arbitration. Both sides have the option to agree to use an arbitrator, but they don't have to. 

• Mandatory or forced arbitration. A dispute must be resolved through an arbitrator. 

• Binding arbitration. The arbitrator's decision is final and can't be overturned in court, barring some special circumstance. 

• Non-binding arbitration. Both sides have the option to reject the arbitrator's decision and file a lawsuit instead. 

Arbitration clauses can be found in a wide range of agreements. Debts that may be subject to arbitration include:

• Credit cards

• Car loans

• Mortgages

• Medical bills

• Private student loans

The arbitration clause may tell both sides which arbitrator they're required to use, or allow them to choose an arbitrator themselves. If you're able to choose the arbitrator, find one through a nonprofit organization like the American Arbitration Association.

What happens once the arbitration process ends? If you're the debtor and the arbitrator rules in favor of your creditor, you'll need to repay what's owed. State laws determine what happens next. 

Typically, the creditor will need to take the arbitrator's decision before a judge to have it confirmed. Once an arbitrator's decision is confirmed by the court, the creditor can then proceed with wage garnishments, bank account levies, or liens—whatever the law in your state allows. Since arbitration is a private process, it won't show up on your credit reports. 

There may be a waiting period between the time the creditor receives an arbitration decision and the time it's confirmed by the judge. You could use that time to try and negotiate a settlement with the creditor to pay less than what's owed. 

For example, if you owe $5,000 to a credit card, you might be able to offer $3,500 instead. Your creditor might agree to resolve your debt for less if it would be difficult for them to garnish your wages or bank account. You can try to resolve debts yourself or work with an expert to arrange a debt settlement.