Recently, a judge in the Eastern District of Pennsylvania made a ruling which could impact any Pennsylvania resident who has signed arbitration agreements with any creditor.
“On September 17, the Eastern District of PA granted a creditor’s request to compel arbitration over a plaintiff’s argument that the arbitration agreement he had signed was void as a result of a bankruptcy court discharging the loan that was governed by the agreement. The court held that the bankruptcy ruling discharged the plaintiff’s debt obligations, not his other obligations under the agreement, such as his obligation to arbitrate claims related to the agreement.” –The National Law Review
This case concerns a Fair Debt Collection practices claim. The lender, One Main, continued to add a discharged debt to the borrower’s credit report. The lender also chose not to add any information that indicated the debt was legally discharged through bankruptcy.
One Main filed a motion to have the entire action stayed in favor of arbitration, citing a clause in the documents the borrower signed when taking out the loan. The court ruled that nothing in the nature of a bankruptcy invalidated the arbitration clause.
Mandatory arbitration agreements are quite common in the financial industry. Banks use them to insulate themselves from liability. Borrowers who sign these agreements, often without realizing what they are doing, waive their right to bring class action lawsuits or to jury trials in disputes.
These practices are controversial. Many consumer protection groups point out that the process typically favors the business. The proceedings are secret, the business pays out a lot less, and the business gets to select the arbiter in most cases, usually by virtue of naming their preferred arbitration company in the loan documents. Theoretically all arbiters are required to remain fair and impartial, but they are also people. Their ability to do so varies.
What should your takeaways be?
First, since you will get credit after bankruptcy you should look for arbitration agreement language on any lease, loan, or credit card agreement you generate. You should also look to see whether they have opt-out clauses or procedures.
Second, if you need to bring an action against a company after your bankruptcy proceedings you will need to check the language of the arbitration agreement. Taking the matter into court right away may work against you. You may need to work out a strategy that helps to position you for a win, even using a process that’s notorious for being rough on consumers.
In this case, it might have also been more effective for the plaintiff to provide Trans Union with documentation showing the reported debt had been discharged through bankruptcy, using the dispute process to get the issue removed or to add the notation.
Usually, bankruptcy offers a clean, fresh start for both you and your credit report. This decision isn’t consumer-friendly, but there are still workarounds if you work with the right bankruptcy lawyers.