Consumers who dispute a credit card charge can open a file with their card issuer. When the credit card company rules in favor of the customer, the merchant for the disputed charge will be debited for funds already paid. This process is called a "chargeback." Despite the card company's finding in favor of the card holder, however, the card holder isn't entirely in the clear -- the merchant usually retains the right to sue.
When a credit card company finds ample cause to reverse a paid credit transaction -- reasons can range from outright fraud to simple processing errors -- the card holder's bank will debit the merchant's account for the amount in dispute. This chargeback usually follows a consumer-initiated investigation of a disputed transaction. Banks do not issue chargebacks lightly; in addition to fees, merchants with high chargeback rates (often more than 2 percent of total transactions) may have their merchant account limited or even terminated.
If a merchant disputes the chargeback, the merchant may file its own grievance process involving the customer's credit card company and sometimes the network that cleared the transaction, like Visa or MasterCard. It is possible the chargeback could be reversed, in which case the customer again is liable for the charge.
If the merchant's dispute is not successful, the merchant can sue the original customer. Simply winning a chargeback doesn't absolve the customer of any lawful debt he may owe to the merchant. If the merchant acted within the scope of law and honored its contractual obligations, the merchant can sue the customer for any loss of income or merchandise associated with the chargeback. In most states, the merchant can also sue to recover expenses and interest.
In addition to a lawsuit initiated by the merchant, the merchant could turn the matter over to a collections agency. The agency will then create a derogatory credit record and attempt to collect on the debt -- and such activity could result in the collector filing a lawsuit, and pursuing more aggressive methods of collection like garnishments and levies.