The Truth About Lawsuit Loans
Lawsuit loans are financial transactions in which a lawsuit “lender” advances money to litigants in exchange for a portion of the future proceeds in a lawsuit or insurance claim. Because these transactions advance money and the repayment of these advances are normally calculated by a percentage rate, they are sometimes referred to as lawsuit loans. They are also known as lawsuit funding, settlement loans, and settlement funding.
Some misconceptions persist however, surrounding lawsuit loans and the transactions themselves. This confusion has sparked a debate as to the “fairness” of these transactions and their appropriate place in the legal landscape. Below, we outline the basics of lawsuit loans; why they are needed; how they are structured; why they are sometimes criticized; and discuss the current state of the lawsuit loan industry. Afterwards, you should have a handle on the truth about lawsuit loans.
The Need for Lawsuit Settlement Loans
Businesses offer lawsuit loans primarily to personal injury plaintiffs who need money to pay expenses while waiting for their cases to settle. Lawsuit loans are a response to a problem many injury plaintiffs face. Unable to work due to injury, plaintiffs found themselves unable to make ends meet. Lawsuit loans, also known as settlement loans or lawsuit funding, solve litigants’ short-term cash flow problems.
Fighting against financially strong insurance companies and their team of defense lawyers is difficult. Personal injury plaintiffs face even more pressure as their injuries often prevent them from working. Cases can drag on for years and because plaintiffs are not earning what they were prior to the accident, many accept “low-ball” settlement offers simply because they cannot hold on financially. Lawsuit loans solve this dilemma.
With settlement loans, plaintiffs get an influx of cash exactly when they need it. They can utilize the money any way they see fit as there is no restriction on its use. Plaintiffs often use the lawsuit loan to pay bills, buy groceries, pay rent or mortgages, or even invest in a new business venture. Lawsuit loans are an extremely flexible liquidity option for litigants in their time of need.
Settlement Loan Alternatives
Plaintiffs usually turn to lawsuit funding when they’ve exhausted all other alternatives. Prior to a lawsuit funding application, clients asked family and friends to float them some money; cashed in retirement funds such as IRA’s, 401k’s or pensions; re-financed their home; sold unneeded assets or possessions, or raised cash by any other means.
Usually, settlement funding loans are the last resort and although lawsuit loans can hedge against an unsuccessful outcome, most plaintiffs avoid them until they exhaust all other options.
Lawsuit Loan Uses
As stated above, there are no outlined restrictions on the use of lawsuit loans. And although many litigants use the cash to pay living expenses, many plaintiffs and their attorneys use lawsuit funding to fund their case. One common example would be utilizing pre-settlement funding to pay for expert testimony either at deposition or at trial.
Another example might be the use of lawsuit funding for medical treatment when medical insurance coverage is unavailable. The way this would work is as follows:
A plaintiff is involved in a slip and fall accident which results in serious injuries. Medical consultations reveal the need for surgical intervention. Because the client has no health insurance benefits to cover the cost of surgery, he/she contacts a funding company for a surgery loan to pay the medical provider directly.
The parties then enter into a contract. On the day of surgery, the lawsuit funding company pays the surgeon, surgery center, anesthesiologist, staff, etc. The client gets the treatment he/she needs. The providers are paid. And the attorney gets to pursue a case with a higher potential settlement value.
Although this scenario is common, the truth is that there are no limits on the use of lawsuit funding. Any expenditure which immediately benefits a plaintiff can be a worthwhile use of the funds.
Funding Transaction Basics
Lawsuit funding transactions advance immediate cash now in exchange for a portion of the future proceeds of a lawsuit or claim. The deal calculates repayment based upon how long the case takes to resolve and whether the case is ultimately successful.
One defining characteristic of a typical loan is that the principal and interest must be repaid under all circumstances. Otherwise, the loan defaults. Lawsuit loans however, are contingent upon a successful outcome. In other words, if the plaintiff does not recover, the “loan” is not repaid. In this sense, a lawsuit loan is not really a loan at all.
Instead, settlement loan transactions are structured as a sale of property rights in case’s future proceeds, if any. If not successfully resolved, there are no proceeds; the lawsuit loan is not repaid; and the client is not obligated any further.
Lawsuit Funding Process
The basic lawsuit loan process goes like this:
Application
- Client or attorney contacts the lawsuit funding company.
- The case basics are discussed on the phone to see if the lawsuit is a candidate for funding.
- Client asks questions about rates/fees, payback amounts, etc.
- Once comfortable, client applies for the advance giving his name and contact information and the name and contact information for his attorney.
- Lawsuit funding company requests appropriate documents from attorney’s office.
Underwriting
- Once the paperwork is received and reviewed, any additional questions are presented to the attorney either through email or a phone call from the underwriting department.
- Lawsuit funding company either approves or denies the application.
Funding
- A lawsuit loan contract is drafted and forwarded to client and counsel.
- Client signs in front of a notary public and returns the documents to the funding company.
- Attorney signs the attorney acknowledgement indicating the advance will be repaid at the time of settlement.
- Lawsuit loan is advanced to the client via overnight, or electronic bank transfer.
- Transaction is completed as the parties await a successful resolution to the case.
- When the case is resolved and successful recovery made, client’s attorney repays the lawsuit loan out of the proceeds.
Attorneys Must Cooperate with Lawsuit Funding Repayment
A lawsuit loan depends a great deal on attorney cooperation. Once an application is completed, requests for information are sent to the attorney of record. Often, clients compile the paperwork themselves, but attorneys still remain an integral part of the process. In fact, legal representation is a pre-requisite for almost all lawsuit loan processing.
Once approved, attorneys must acknowledge the assignment and agree to repay the amount owed at the time of disbursement. To say the relationship between the representing attorney, the client and the funder is important is an understatement.
Lawsuit Loan Rates, Fees and Cost Calculation
Settlement loans can come at significant cost. The cost is determined by processing fees and the use of a percentage rate in calculating the ultimate repayment based on time. Some lawsuit loan companies call the calculation a “use fee” and not “interest”. There are no payments on the funding until the case is resolved or the advance is repaid in full prior to settlement.
Rate Structure Types
Settlement loan companies use generally two different types of rate structures. The first type calculates repayment by charging a monthly percentage rate on the contract amount. The next month the percentage rate is charged on the repayment amount (monthly balance). Because this calculation charges interest on the balance and not the original contract amount, the charges are said to “compound” monthly.
The second type of charge applies a percentage rate on the original contract amount in 6 month increments. This non-compounding rate structure is also known as “simple” interest”.
Payoffs for the compounding rate structure are generally less in the first six months. Afterwards, the differences in these two lawsuit loan repayment types is insignificant if the advance is repaid within two years. After two years, compounding repayment amounts are generally larger than simple interest payoffs.
Lawsuit loan rate comparisons can be a great source of information. You can also use a lawsuit loan payoff calculator and define your own terms. The real difference in cost can be seen after 2 years.
Settlement Loan Repayment
Lawsuit loans normally calculate repayment in 6 month increments. That is, if the case is resolved anytime within a 6 month period, the repayment is the same. For example, a $10,000 funding contract executes on January 2, 2020. The agreement calls for repayment of 18% every six months – simple interest. The case is settled in August. The repayment is $13,600 because the case was resolved in the second 6 month “bucket”.
Bear in mind that it makes no difference whether the lawsuit loan in repaid in the 7th month, or the 10th month. The repayment is the same for the entire 6 month period.
Further, the lawsuit advance’s repayment normally must be repaid in full in order to be discharged. Partial payments are generally not accepted by lawsuit loan companies.
Lawsuit Loan Critics
The majority of media coverage opposing the use of lawsuit loans comes from those defending negligence claims. These entities (insurance companies or their proxy(ies)) cite “outrageous” costs and fees associated with lawsuit funding contracts and the need for reform for clients’ own “protection”. Attacks seek to classify settlement loans as traditional loans and because the terms are more expensive than traditional loans, opponents argue terms violate established usury laws.
It should come as no surprise lawsuit funding should come under attack by the very deep pocketed parties who hold financial leverage over plaintiffs during litigation. Insurance companies dig in their heels on large cases simply because they can. The longer the delay, the more money they can earn from premium dollars already under their control.
The delay in payment of claims is the very reason lawsuit funding exists. Of course, litigation delays are not entirely the result of insurance company defense tactics. The civil court system backlog in many urban jurisdictions is substantial. Still, insurance companies benefit from this delay because the longer cases drag on, the more likely a financially stressed plaintiff will accept a less than adequate settlement offer.
Of course, everyone is entitled to their opinion. Insurers are entitled to voice theirs. But opinion is NOT fact and the fact is: litigants look to lawsuit loans to help them bridge the financial gap between the filing of a claim and its ultimate resolution. Calls for tort reform can always be heard but the success of the lawsuit funding industry shows a legitimate need is being filled in the marketplace.
Lawsuit Funding Proponents
Lawsuit loan companies need only point to growth of the lawsuit funding industry to show clients’ needs are being met. If there was no need for lawsuit loans, clients would not use them.
Responding to fairness arguments brought by critics, many lawsuit loan companies adhere to the industry’s lawsuit loan best practices as outlined by the Attorney General of the State of New York. Several years ago, lawsuit loan companies in the northeast worked diligently with then Attorney General, Eliot Spitzer, to create guidelines from which lawsuit funding companies draft their contracts.
Some of the provisions mandate all contracts contain a disclosure statement which:
- States the total amount to be advanced to the consumer;
- Itemizes one-time fees, broken out item by item (e.g. application, processing, attorney review, broker, etc.);
- States the percentage fee or rate of return, stated on an annualized basis, including frequency of compounding;
- States the total amount to be repaid by the consumer, broken out by six month intervals, carried forward to 36 months, and including all fees as well as any minimum required payment amount.
The guidelines also allow a 5 day right of rescission to clients among other safeguards.
Lawsuit loan proponents cite these guidelines as proof the industry is here to help plaintiffs by offering liquidity solutions in an upright and honest manner. These proactive steps illustrate this intention and show an attempt to legitimize their business practices.
Current State of the Lawsuit Loan Industry
The lawsuit loan industry is constantly changing in accordance with the needs of litigants. Although much of lawsuit funding involves funding individual personal injury lawsuit plaintiffs, lawsuit funding for large complex litigation has increased over the last few years. Some lawsuit funding companies are financing the costs associated with major mass tort litigation such as trans-vaginal mesh and other product liability lawsuits. Large law firms utilize lawsuit loans to fund their operations because these types of lawsuit involve large defendants and sometimes thousands of clients. The overhead of such an operation is very high. Without lawsuit funding, clients might not be able to pursue justice.
Recent Lawsuit Funding Decisions
Recent decisions involving lawsuit loans refute attempts to classify these transactions as traditional loans. Most state usury laws limit the amount of interest a lender can charge. If usury laws applied to lawsuit loans, settlement funding companies could not turn a profit. If courts should decide lawsuit loans are traditional loans, most, if not all, lawsuit loan companies would cease operations.
In Ruth v. Cherokee Funding, Cherokee advanced money to their client, Ruth at 4.99% per month. At the time of settlement, Ruth’s attorneys refused to pay stating the agreement violated certain laws in the state of Georgia. The Georgia Supreme Court found: “The provision of funds under an agreement that imposes only an uncertain and contingent repayment obligation is not a ‘loan’… such a transaction is better characterized as an ‘investment contract.’”
Similarly, in December, 2018, the New York Appellate Court found in Cash4cases v. Burnetti: “Although the interest rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant.”
Many states repeatedly hold that lawsuit funding contracts are not loans in the traditional sense of the term. Others states however, have outlawed the practice of advancing money to litigants. Support for these decisions sometimes rests on the legal doctrine of Champerty. (See Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217, 219 (Ohio 2003))
Despite repeated attempts to pressure lawsuit loan companies, many jurisdictions recognize lawsuit loans as serving an established public need.
Types of Cases Which Qualify for Settlement Funding
The following types of cases are routinely advanced money prior to settlement.
- Auto Accidents
- Slip/Trip and Fall Cases
- Workers’ Compensation (Workers’ Comp)
- Dog Bites
- FELA (Railroad Workers)
- Jones Act (Maritime Injury)
- Medical Malpractice
- Nursing Home Negligence
- Product Liability
- Wrongful Death
- And more . . .
By far the most common is the auto accident lawsuit loan. These are the easiest cases to qualify for because it is relatively easy to establish liability based upon a police report or where the damage is located on the vehicle.
Slip and fall cases or premises liability lawsuit loans where a person is injured to negligence of a property owner or other party who breached a duty of care are also common.
Approvals depend on a variety of factors including the case’s location (state and county), case type, retained attorney, availability of documents, available insurance coverage, stage of proceedings and host of other underwriting factors.
One universal lawsuit loan requirement is that the plaintiff must be represented by counsel. As stated previously, without the presence of the attorney, there is no lawsuit funding.
Help with Lawsuit Loans
As you can see, lawsuit loans fill a legitimate need in the marketplace. They are an integral part of personal injury law and the legal landscape in general. If you have any questions regarding lawsuit loans, lawsuit funding, or another type of legal financing, please do not hesitate to contact us at 888-964-2224. We are here to help you get what you need, when you need it. Use lawsuit loans to pay for living expenses, case costs, medical care or any other need. When financial strain forces you to consider accepting less than you deserve, don’t wait – call Fair Rate and let us help you.
Thank you for your interest in lawsuit settlement funding.
