04 March 2015

Consumer Debtors, Arbitration, and Bankruptcy

As my law-oriented readers probably know, the United States Supreme Court has upheld the validity of mandatory arbitration and class action waivers in consumer contracts. In other words, there is no way within the legal system to redress the violations of law by businesses that provide consumer products and services. The loss to an individual consumer is too small to contest in any forum so vendors, creditors, and lenders will continue to undertake actions like this:
In November 2014, national news media reported allegations that large national lenders, including JPMorgan Chase, Bank of America, and Citigroup, were systematically violating the law to the detriment of their customers. Specifically, these banks allegedly refused to remove debt that had been discharged in bankruptcy from borrowers’ credit reports as a means of pressuring borrowers into repaying the debts.
For more examples of systemic creditor abuse I recommend that you download and read the latest article by bankruptcy scholar Kara Bruce, Vindicating Bankruptcy Rights. Professor Bruce argues that even though consumer-oriented class actions have gone nearly extinct, "the prototypical debtor class action—a class of consumer debtors suing a common lender for widespread violations of bankruptcy law—[nonetheless] remains viable in the modern, anti-class-action framework." In other words, no contract can absolve a creditor of its statutory duties under bankruptcy law, and no contractual agreement not to be party to a class action binds the bankruptcy court.

Kara's article is lengthy and not for the casual reader. It does, however, point a way to open the door to legal redress for some violations of the rights of some consumers.


  1. Kara's work is excellent and highly recommended. Her solution does, of course, require a consumer to be in bankruptcy to take advantage of it. As a result, it may be not be the way forward to resolve the mandatory arbitration issues in all cases. But it usefully notes that--if in bankruptcy--different rules ought to apply.

  2. Hi Matt! You're right--the problem of arbitration clauses is a big one, and with hope the CFPB (or the Court) will respond with a more comprehensive solution. But when this abuse trickles into the bankrutpcy world, bankruptcy courts should not be deterred by the Supreme Court's aversion to class actions. Different rules ought to (and do) apply. Thanks for the review, Scott!