Lawsuit Loans – a Different Type of “Collateral”

Lawsuit loans are specialty financial transactions where lawsuit “lenders” advance money to plaintiffs in anticipation of settlement. Although lawsuit loans are not technically loans, the transactions analyze lawsuits and use future lawsuit proceeds as a type of “collateral” to secure the advance. In this post, we examine the use of future lawsuit recoveries as collateral for lawsuit funding investments.

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Lawsuit Loans – a Unique Investment Idea

Lawsuit loans bridge the financial gap between the time plaintiffs are harmed and their ultimate recovery through the civil legal system. Legal system delays are inherent in the judicial process, so many plaintiffs must wait many months or even years before they are compensated for their losses. Many plaintiffs, especially those who are involved in personal injury lawsuits, are unable to earn as much as before the events giving rise to the lawsuits. This results in financial strain while cases progress through the system.

Financial trouble causes plaintiffs to seek available sources of money to keep afloat. Many tap into their personal “rainy day” funds, others sell off assets, take on debt or utilize other traditional sources of financing. Lawsuit loan companies do not actually use lawsuits as collateral but pending lawsuits/claims are another source of funds.

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Traditional Collateral

Collateral is something of value pledged as backing for traditional loans. If a borrower stops making payments or otherwise defaults on the loan, the lender can seize that property as full or partial payment.

Traditional loans can be secured or unsecured. Unsecured loans are not backed by collateral. These might include most credit card purchases or cash advances. These are riskier investments for lenders so debtors can expect to pay more in these types of arrangements.

Secured loans are secured by collateral. Examples of secured loans are car loans and mortgages. Under these instruments, debtors sign both a promissory note (which outlines the interest, payments and other terms) and a security instrument (which grants the lender a security interest in the pledged collateral). When a debtor defaults on a secured loan, the lender has the right to take over the collateral. For example, when a debtor fails to make payments on a car loan, the lender repossesses the vehicle. They will often resell the automobile and use its value to compensate for its loss.

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Lawsuit Loans – a Sale of Property Rights

Lawsuit loans are specialty financial transactions which provide capital to plaintiffs with immediate liquidity needs. Although the property interest in any given lawsuit is thoroughly analyzed before any money changes hands, lawsuits as collateral is actually a mistake in characterization.

Instead of securitizing an advance with a lawsuit as collateral, lawsuit loans are the sale of a portion of the anticipated recovery. In other words, a plaintiff sells a portion of the recovery ahead of time. Lawsuit loans are a transfer of property rights. Plaintiffs do not “borrow” funds by using the lawsuit as collateral.

Selling any property is a means of raising cash. Property rights exist so people can store value. Thus, when an entity seeks to raise capital for any reason, they can offer their property for sale in the marketplace. The lawsuit funding industry is one such marketplace.

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Lawsuits as Collateral – Sort of . . .

Although lawsuits are not collateral, their value is used in a variety of ways.

Lawsuit Loans as a Lien

When lawsuit loan deals are entered, plaintiffs (sellers) transfer an interest in part of the future recovery. Once the deal is done, plaintiffs receive the money and lawsuit funders receive a signed lawsuit funding contract. The executed agreement is then sent to plaintiffs’ counsel to be place as a lien on the file. Some lawsuit liens have priority over lawsuit loans. These include contingency attorneys’ fees, child support liens, tax liens and others.

When lawsuits settle, lawyers deposit the funds into an attorney trust account and disburse the proceeds from this account. Ethics rules dictate lawyers pay off legitimate claims against any lawsuit proceeds. Lawsuit advances are one such claim. Although placing the contract in the file does not define the lawsuit as collateral, its purpose is the same – protection for the lawsuit “lender”.

Lawsuit Values Determine Available Funding Amounts

Using lawsuits as collateral is not necessary when deciding whether to advance money in anticipation of settlement. Yet valuing a potential recovery is vital to all lawsuit funding operations. This practice of evaluating lawsuits for purposes of lawsuit loans is often referred to as lawsuit funding underwriting.

Underwriting lawsuits is important because it qualifies a particular case for funding and also answers the question: how much lawsuit funding can I get? To do this, underwriters analyze liability, damages and defendants’ ability to pay compensation to plaintiffs. While lawsuits are not collateral, they are used as a measure of value for lawsuit funding operations.

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Not Using Lawsuits as Collateral

While lawsuit funding businesses do not use lawsuits as collateral, they can be used by plaintiffs to secure much needed financial support. As explained above, future lawsuit proceeds are saleable assets from which plaintiffs can secure funds. Lawsuit loans are structured differently, but the net result is the same – money in the hands of those who need it.

To get started with lawsuit funding, you need only do a little bit of research and explore your options. There are costs and benefits of getting settlement money early. If you have any questions or want to know if you qualify, simply pick up the phone and give us a call. You’ll reach a live person during business hours who can answer your questions.

Or you can contact us online for more information. Fortunately, lawsuit loans are a viable option to plaintiffs in financial distress. Call Fair Rate Funding today. We are here to help and are at your service.

Thank you for your interest in Fair Rate Funding.