New York financier J. Michael Cline set out to build a billion-dollar empire in the realm of consumer-debt disputes. His firm would stand at the center of a complex arrangement linking America's biggest arbitrator of consumer credit-card disputes with another business that collects debts in some of those same cases.

Instead, his grand plans have unraveled, turning the entire world of consumer arbitration on its head.

Amid a congressional investigation, regulatory complaints and lawsuits from consumers, Mr. Cline's woes are prompting a major shift in the way many U.S. consumer-debt disputes are settled.

For more than a decade, most credit-card companies have required customers to use arbitration, rather than the courts, to resolve disputes over unpaid bills. Minneapolis-based NAF has mediated the vast majority of these claims. But both NAF and another arbitrator have stopped hearing arbitrations of consumer-debt cases, and major banks are dropping arbitration requirements.

"I actually think there is a fairly significant change afoot," says Richard Reuben, a law professor and arbitration specialist at the University of Missouri. Banks "don't need the taint that comes with mandatory arbitration."

It's a big comedown for Mr. Cline, who helped found leading online movie-ticket vendor Fandango and pledged millions of dollars to save Asian tigers from extinction.

In 2006, he and his private-equity firm, Accretive LLC, set out to acquire a stake in the National Arbitration Forum, the nation's largest consumer-debt-arbitration body. An Accretive executive told NAF the organization had the potential to blossom into a billion-dollar business. By expanding beyond credit-card disputes to resolving disagreements between hospitals and patients, NAF had the potential to be "the center of a broad arbitration ecosystem," Mr. Cline's firm said, according to an Accretive presentation to NAF.

At the same time, Mr. Cline was quietly making another big bet on the debt business. Through its funds, Accretive created a separate debt-collecting business. That firm, Axiant LLC, ran call centers and helped collect consumer debt following NAF arbitrations.

In a July complaint, the Minnesota attorney general's office alleged that NAF deceived consumers and engaged in false advertising. Consumers didn't realize that NAF was financially affiliated with "one of the country's major debt collection enterprises," the complaint alleged. Accretive created Axiant in tandem with employees of Mann Bracken, a debt collector that regularly represented credit-card companies in NAF arbitrations, the complaint alleged. At the same time, Accretive funds and NAF Inc. jointly own the back-office entity for NAF, called Forthright.

This structure, the Minnesota complaint alleged, obscured Accretive's efforts to dominate both sides of the debt-collection business: arbitration and debt collection. While telling consumers that it was an impartial arbitrator, NAF worked closely with creditors, the regulator claimed, including drafting claims against consumers.

NAF says its arbitration system is fair. It provides "the most inexpensive option for consumers to resolve a dispute," rather than going to court, according to an NAF statement.

An Accretive spokesman says that Forthright and Axiant provide information technology and processing for NAF and Mann Bracken, respectively. But Accretive doesn't control either NAF or Mann Bracken.

The 49-year-old Mr. Cline and his firm weren't named defendants in the Minnesota complaint. There is nothing in the complaint alleging that Accretive and Mr. Cline condoned improper arbitration methods at NAF and Forthright. Mr. Cline declined requests for comment.

NAF settled the case with Minnesota Attorney General Lori Swanson in July without admitting the charges. It agreed in the settlement to stop arbitrating credit-card cases nationwide.

The case has made waves. Another arbitrator of consumer debt, the American Arbitration Association, which handled far fewer of the cases than NAF, has also stopped hearing such cases. The AAA said its decision wasn't related to NAF's case, but it decided to stop arbitrations after an evaluation revealed "weaknesses in the consumer debt collection arbitration process," according to its Web site.

The exit of the nation's two main debt arbitrators is part of a larger shift by banks away from requiring unhappy customers to arbitrate disputes, rather than go to court. In August, Bank of America Corp., which had used NAF to handle disputes, said credit-card holders now are free to go to court rather than being forced into arbitration. J.P. Morgan Chase & Co., citing recent events, ceased filing new arbitration credit-card claims in July and is evaluating whether to continue to include an arbitration clause in consumer contracts.

Arbitration and mediation have existed as ways to resolve disputes in the U.S. for more than 200 years. They became the standard practice in the financial world after 1987, when a Supreme Court decision gave securities firms the go-ahead to require arbitration to resolve brokerage-account disputes.

In a typical case, a bank refers an unpaid credit-card bill to a debt collector. If the collector is unsuccessful at recovering, it refers the case to an arbitration body. Arbitration bodies, such as NAF and AAA, which generated revenue by charging fees to the parties involved, use retired judges and attorneys to decide the cases. If the arbitrator rules for the creditor, the collector can ask a court for a judgment to collect. Because a debt collector can earn up to a third of the debt outstanding when the ruling is in the bank's favor, it can be in a collector's interest for an arbitrator to rule against the card holder.

Former arbitrators, a congressional subcommittee, consumers and government suits are now alleging that NAF has been systematically ruling against consumers for years. Banks prevail over consumers in 94% of debt-collection arbitrations, an NAF official said in recent testimony to a congressional subcommittee.

Arbitration advocates defend those results, citing studies that show debtors lose at a similar rate in court. They say that there is typically a long paper trail proving that customers owe the amounts in dispute.

A congressional subcommittee, which began an investigation last year to study the fairness of mandatory arbitration, concluded in July that the current arbitration system is "ripe for abuse." Arbitration, as "operated by NAF, does not provide protection for those consumers," the committee said.