Jim Flynn
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Jim Flynn, Money & the Law

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There are many reasons why you might choose to pay for goods or services using a credit card instead of cash, a check or a debit card — convenience, record keeping, kids in college, etc.

One reason you may not know about comes from a provision buried in the dark recesses of the Truth In Lending Act. This provision allows you to withhold payment of part of your credit card bill if you have a dispute with a merchant. This is important because, as any lawyer who has been around the block a few times will tell you, if you’re in a legal dispute involving money, it’s best to be the stakeholder — the legal system makes it easier to hold on to your money than to take money away from someone else.

The section of the Truth In Lending Act — 1666i — says: “[A] card issuer … shall be subject to all claims … and defenses arising out of any transaction in which the credit card is used as a method of payment … . ”

Since we’re talking law here, there are, of course, additional rules. First, the location of the transaction must be in the card holder’s home state or, if not, within 100 miles of the card holder’s mailing address. Thus, you can’t live in Wahoo, Neb., and refuse to pay for a botched car repair in Ouray.

The purchase must exceed $50.

The card holder also must try in good faith to resolve the dispute directly with the merchant before the right not to pay can be exercised.

If those conditions are satisfied and the card holder elects not to pay, the card holder must notify the card issuer in writing about that decision. The card issuer must suspend the charge pending resolution of the dispute. The card issuer cannot use nonpayment of the disputed amount as the basis for declaring a default, imposing a late charge or filing negative information with a credit reporting agency.

Credit card issuers don’t like this part of the Truth In Lending Act because they get caught in the middle. After all, the card issuer has lent the card holder money to make the purchase and paid the merchant. As a matter of contract, the card issuer can take the money back from the merchant, but card issuers don’t like to use that right.

Instead, issuers often respond to a notice that a card holder is exercising the right not to pay with a letter like this: “Dear card holder. We received your notice. But, hey, this dispute is between you and your merchant. We’re just an innocent lender here and, you know, you really ought to pay us and work out your problem with the merchant.” One of my card issuers also makes a subtle threat that it can “investigate” the underlying dispute, decide who’s right and report me as delinquent if it disagrees with me. But the Truth in Lending Act gives card issuers no such right.

Card issuers are required to tell card holders about the right of nonpayment. Therefore, tucked away in the back pages of your monthly billing statement, you will find a disclosure saying what you need to do to exercise your right of nonpayment and outlining the conditions that must be met before the right can be exercised.

The law doesn’t allow you to recoup a payment that has already been made so, to be on the safe side, you need to exercise the right of nonpayment when the disputed charge first appears on your statement.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Contact him at moneylaw@jtflynn.com. “Best of Jim Flynn’s Money & the Law” is now available at amazon.com — paperback or e-book.

Jim Flynn is with the Colorado Springs firm of Flynn & Wright LLC. Contact him at moneylaw@jtflynn.com. "Best of Jim Flynn's Money & the Law" is now available at amazon.com — paperback or e-book.

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