Forced Arbitration Roadblock: Consumer Denied Access to Remedies After Debt Relief Help Fell Flat

For-profit debt settlement companies often make big promises to consumers that they can’t keep. They target consumers in financial trouble with promises to negotiate with their creditors to reduce or even erase debts, encouraging consumers to stop paying their creditors and start paying the debt settlement company instead. But oftentimes, consumers are left worse off after signing up for “debt settlement” than before, with possibly even more debt and lawsuits from debt collectors.

In 2017, Dean Schreiber turned to Bedrock, a debt settlement services company, for help managing his debts. Mr. Schreiber received a welcome guide brochure from Bedrock which stated it had a track record of success with all major creditors. The guide instructed customers to stop making payments on any credit cards enrolled in Bedrock’s program. Mr. Schreiber stopped making payments and followed the debt settlement company’s plan.

He later discovered that one of his creditors chose not to participate in Bedrock’s settlement plan. The creditor sued Mr. Schreiber for the debt that he had hired Bedrock to settle, obtained a court judgment against him, and started garnishing his wages.

Eventually, Mr. Schreiber sought legal help against Bedrock in a Minnesota court for violating the Minnesota Debt Settlement Services Act.

In a complaint against Bedrock, Mr. Schreiber claimed that the debt settlement company failed to give him notice of the potential consequences of stopping payments to his creditors, required under Minnesota law. He also contended that Bedrock violated Minnesota law by failing to properly disclose its fees; charging fees in excess of the amount it was actually able to save him; and collecting payments from him before it had fully performed its debt settlement services.

In court, the settlement company moved to kick Mr. Schreiber’s legal action out of court using terms in its contract that required private arbitration of disputes.

Mr. Schreiber fought against enforcement of the arbitration clause in the debt settlement contract. Bedrock, in an apparent attempt to avoid contractual liability, included in the contract a term that said the contract could only be enforced after it was signed by both parties. Mr. Schreiber pointed out that Bedrock never signed the contract, a fact Bedrock did not dispute. But when Bedrock wanted to enforce the arbitration clause, Bedrock argued that its failure to sign — and its own language saying the contract was not enforceable if Bedrock didn’t sign — didn’t matter.

The court concluded that Bedrock’s arbitration clause could be enforced against Mr. Schreiber. His case was forced out of court and into private, closed-door arbitration. Mr. Schreiber eventually settled his case privately, but there was no public judgment, leaving Bedrock potentially free to continue to engage in similar alleged conduct towards other customers.

One of the major drawbacks of forced arbitration compared to an open court is its secretive nature. The decisions are usually kept private and are typically not appealable, giving the public little opportunity to learn about corporate misconduct. Through forced arbitration, corporations can keep their wrongdoing under wraps and ward away scrutiny of any unsavory business practices.

It is clear that Minnesota intends to protect its residents from sketchy debt settlement services. Its debt settlement law contains strong protections, and it also bans forced arbitration requirements in debt settlement service contracts in an effort to ensure that victims can get their claims heard before a judge and jury. Unfortunately, the broadly interpreted Federal Arbitration Act most likely would preempt and nullify the state’s protection against forced arbitration.

The U.S. Congress on the other hand can take action on forced arbitration. To hold bad actors accountable, lawmakers should step up and pass the Forced Arbitration Injustice Repeal Act. This legislation would ban forced arbitration clauses from consumer and worker contracts, allowing harmed individuals like Mr. Schreiber to be heard once more.

National Association of Consumer Advocates (NACA) is a nonprofit association of attorneys and advocates committed to representing customers’ interests.