Arbitration Clauses in Credit Card Agreements: How to Use Them in Your Defense

An arbitration clause is a provision in your credit card agreement that says any disputes under the account must be resolved through binding arbitration, not through court litigation.

An arbitration clause typically says something like: "Any dispute arising out of or relating to this Agreement or your account shall be resolved by binding arbitration administered by the American Arbitration Association (AAA) or JAMS Arbitration, Inc. (JAMS), rather than in court."

Arbitration is a private dispute resolution process. Instead of taking your case to court with a judge and possibly a jury, you and the other party go to a private arbitrator (often a retired judge or experienced attorney) who hears the case and makes a binding decision.

Arbitration has advantages and disadvantages. For consumers in small disputes, arbitration is often faster and less formal than court. But for debt collection cases, arbitration has become a powerful defensive tool because of the costs involved.

Why? Because arbitration is expensive. Filing fees, arbitrator hourly rates, and administrative costs add up quickly. When a consumer invokes arbitration in a debt collection case, the debt buyer must suddenly decide whether it is worth paying $3,000 to $5,000 or more in arbitration costs to collect a $3,000 debt.

When you signed your credit card agreement, you agreed to the terms in that agreement - including any arbitration clause. Those terms are part of the contract that gave rise to the debt.

When the original creditor sold your account to LVNV Funding, LVNV did not receive a new contract with you. LVNV received only a purchased right to collect on your account under the terms of the original contract. This means LVNV purchased your account subject to all the original terms - including the arbitration clause.

Here is the key point: the arbitration clause belongs to you as much as it belongs to the creditor. If the clause says "either party may invoke arbitration," then you can invoke it against LVNV.

Many consumers do not realize this. They think the arbitration clause is something the creditor uses against them. But the clause cuts both ways. If the creditor filed suit in court instead of arbitration, you can invoke the arbitration clause and force the case back out of court.

This is a powerful tool that many pro se defendants never use.

The arbitration fee-trap strategy exploits a fundamental problem with arbitration economics in debt collection cases.

Here is how it works. You file a motion to compel arbitration in the case filed against you. The court grants your motion and orders the case to arbitration. The case moves to arbitration (typically AAA or JAMS, whichever is named in the agreement).

Once in arbitration, the arbitration provider (AAA or JAMS) assesses filing fees. For a "business claimant" (which includes a debt buyer suing in its business capacity), filing fees are substantial. AAA's filing fees for a claim between $1,001 and $5,000 can run $250 to $600, depending on the amount. JAMS fees are often higher. On top of that, the arbitration provider assesses hourly fees for the arbitrator's time, which can run $400 to $600 per hour or more.

In many cases, the total cost of arbitration exceeds the amount in dispute. A $3,000 debt can cost $4,000 to $5,000 in arbitration fees.

When the debt buyer receives the arbitration fee bill from AAA or JAMS, the economics become clear: paying $4,000 in fees to collect a $3,000 debt is a losing proposition. Debt buyers routinely abandon arbitration cases and dismiss the lawsuit.

This is why it is called a "fee trap." By invoking arbitration, you create a situation where the debt buyer must choose between paying more in fees than the debt is worth or walking away.

Many debt buyers walk away.

Filing a motion to compel arbitration requires several steps:

**Step 1: Verify the Arbitration Clause Exists**

Find your original credit card agreement and confirm that it contains an arbitration clause. If you do not have a copy of the agreement, you can request it from LVNV during discovery (demand that they produce the original agreement). The plaintiff is required to produce the account documents.

**Step 2: Determine the Arbitration Forum**

The arbitration clause will name the arbitration provider: AAA, JAMS, or sometimes another provider. Note the name.

**Step 3: File the Motion**

File a motion to compel arbitration with the court. The motion should say something like: "Defendant moves this court to compel arbitration of this dispute pursuant to the arbitration clause in the cardholder agreement between Defendant and [Original Creditor], which clause is incorporated herein by reference. Defendant respectfully requests that the court order the parties to arbitration under AAA [or JAMS]."

Attach a copy of the arbitration clause as an exhibit to the motion.

**Step 4: Serve the Plaintiff's Attorney**

Serve a copy of your motion on the plaintiff's attorney (the same attorney you served with your answer).

**Step 5: File the Motion in Your Court**

File the motion with the court clerk, following the same procedures you used to file your answer.

**Step 6: Respond to Any Opposition**

The plaintiff's attorney may file a response opposing your motion. If they do, you may have the opportunity to file a reply. Prepare your reply in advance.

**Step 7: Court Hearing (if required)**

Some courts hold a hearing on the motion; others decide it on the papers without a hearing. Be prepared to argue orally if needed.

**Step 8: If Granted, Initiate Arbitration**

If the court grants your motion, the case is ordered to arbitration. You will then receive instructions from the arbitration provider (AAA or JAMS) on how to initiate the arbitration proceeding.

Timing matters for an arbitration motion. File it strategically:

**Early is Best**: File the motion to compel arbitration early in the case, ideally with or shortly after you file your answer. Filing early puts maximum pressure on the debt buyer to decide whether to pursue arbitration. The earlier you file, the more time the debt buyer has to think about the fee trap and whether to abandon the case.

**Before Litigating the Merits**: Do not litigate other issues (chain of title, statute of limitations, etc.) before raising arbitration. In some states, litigating the merits before raising arbitration can be construed as a waiver of the arbitration defense. File your answer with a denial of all allegations, then immediately file the arbitration motion without engaging in discovery or motion practice on other issues.

**If You Missed Early Filing**: Even if you did not file the motion immediately, file it now. Courts generally prefer arbitration when it has been properly invoked, even if the motion comes later in the case.

Arbitration enforcement varies by state. Here are key rules:

**New York (CPLR Section 7503(a))**: Courts must compel arbitration if a valid clause exists. The standard is strict. Once compelled, AAA/JAMS business fees commonly exceed the disputed balance, causing many debt buyers to abandon.

**Illinois (710 ILCS 5/2)**: The Illinois Uniform Arbitration Act requires courts to stay proceedings and compel arbitration if a valid agreement exists. Business filing fees often exceed the dispute amount.

**Florida (Fla. Stat. Section 682.03)**: Florida courts enforce arbitration clauses but strictly construe them. When AAA/JAMS business fees exceed the disputed amount, debt buyers commonly abandon - and Florida's FCCPA Section 559.72(9) lets you sue them for filing a baseless suit even after they walk.

**Wisconsin**: Wisconsin courts will compel arbitration if the agreement is valid and the dispute falls within its scope. To use this defense, you generally need a copy of the cardholder agreement showing the arbitration clause.

**Texas (Tex. Civ. Prac. & Rem. Code Section 171.021)**: Texas courts enforce arbitration clauses under the FAA. Business filing fees on credit-card debt commonly exceed the disputed balance, causing abandonment.

**California (CCP Section 1281.4)**: California gives defendants an offensive arbitration option. If you compel arbitration and the debt buyer (as drafting party) fails to pay JAMS/AAA fees within 30 days, they waive arbitration and you can return to court via a motion to lift the stay.

**New Jersey (N.J.S.A. 2A:23B-7)**: The Atalese clear-and-unambiguous waiver standard applies. You may file a Motion to Compel Arbitration in the Special Civil Part directly under N.J.S.A. 2A:23B-7 without transferring to the Law Division.

**Ohio (R.C. 2711.02)**: The arbitration stay is mandatory when a valid clause exists. R.C. 2711.02(C) makes any denial of a stay immediately appealable as a final order - strong defendant leverage.

**All States**: The Federal Arbitration Act (9 U.S.C. Section 2-4) preempts state law that disfavors arbitration. If state law has any anti-arbitration exceptions, the FAA generally overrides them for contracts involving interstate commerce (which most credit card agreements do).

The arbitration strategy is most effective in these scenarios:

**1. You Have the Original Cardholder Agreement**

If you have your original credit card agreement and it contains an arbitration clause, the case is strong. File the motion and pressure the debt buyer to abandon.

**2. The Debt Amount Is Below Typical Arbitration Cost Thresholds**

If the debt is under $5,000 and arbitration fees would run $3,000+, the math clearly disfavors the debt buyer. They will likely abandon.

**3. The Arbitration Clause Names AAA or JAMS**

AAA and JAMS have published fee schedules showing high business filing fees. The debt buyer can calculate in advance that arbitration will be expensive. If the clause named a different, cheaper arbitration provider, the strategy would be weaker.

**4. You Live in a Pro-Arbitration State**

Some states (New York, California, Texas, Florida) have strongly pro-arbitration courts that favor enforcing clauses. In these states, your motion to compel has a higher success rate.

The arbitration strategy may not work in these scenarios:

**1. You Cannot Find the Original Cardholder Agreement**

If you do not have your original agreement, you can request it from the debt buyer during discovery. But if the debt buyer cannot produce it, your arbitration defense becomes harder. The court may not compel arbitration if the arbitration clause cannot be proven to exist.

**2. Your State Does Not Have a Strong Pro-Arbitration Rule**

Some states have arbitration statutes with consumer-protection carve-outs. A few states allow consumers to reject arbitration in certain contexts. However, the Federal Arbitration Act generally overrides these state rules, so this scenario is rare.

**3. The Debt Buyer Is Willing to Pay Arbitration Fees**

Large debt buyers with large case portfolios may absorb arbitration costs as a cost of doing business. If the debt buyer has decided to pursue arbitration despite the costs, the strategy does not lead to abandonment.

**4. The Arbitration Clause Is Waivy or Unconscionable**

In rare cases, a court may find the arbitration clause is unenforceable because it is "unconscionable" (grossly unfair) or was waived by the debt buyer's conduct. This is a fact-specific analysis, but it can happen.

**5. The Clause Was Modified or Expired**

If the cardholder agreement has been updated and the new agreement does not contain an arbitration clause, the old clause may not apply. The debt buyer would argue that the newer agreement superseded the older one.

California offers a unique twist on arbitration that heavily favors defendants. California Civil Code Section 1281.97-98 (effective January 1, 2022) says:

If the plaintiff invokes arbitration (files a motion to compel), the plaintiff must pay the consumer's share of arbitration fees within 30 days. If the plaintiff fails to pay, the obligation to arbitrate is waived, and the case returns to court.

This creates a powerful tool for California defendants. When a debt buyer compels arbitration in California and then fails to pay the required fees within 30 days, you can file a motion to lift the arbitration stay and return to court. At that point, you have a much stronger position: the debt buyer chose arbitration but then refused to pay for it.

If you are sued in California and the debt buyer is willing to pursue arbitration, keep track of the 30-day deadline for the debt buyer to pay. If they do not pay, immediately file a motion to lift the stay and return to court.

This California-specific rule adds another dimension to arbitration strategy in that state.