Potential Reasons You Were Denied a Lawsuit Loan
Applying for lawsuit loans is easy, but what are the implications when you are denied a lawsuit loan? Most lawsuit loan applicants are approved for funding. In this post, we examine the reasons why plaintiffs are unsuccessful in their quest for financial support through legal funding, a.k.a. lawsuit loans.
What are Lawsuit Loans?
Lawsuit loans are financial transactions where plaintiffs receive a portion of their lawsuit settlement prior to the case’s resolution. In return, plaintiffs pledge a portion of their settlements at some point in the future but only if they win their cases. The repayment amount is dependent upon how long it takes to finish the case.
Lawsuit loans sell future property rights in the settlement and for this reason, repaid only if the lawsuit succeeds. For this reason, lawsuit loans are not actually loans in the traditional sense of the word, since regular loans imply repayment under all circumstances.
Reasons to be Denied a Lawsuit Loan
Each lawsuit is evaluated on its own merits for purposes of lawsuit loan approvals. Below are a few reasons why a lawsuit funding company will pass on the opportunity to invest capital into a particular case.
Attorney Representation
Lawsuit loans are generally not available to plaintiffs who do not have an attorney on retainer. While some pro se plaintiffs apply for cash advances on their pending lawsuits, attorney cooperation is an integral part of the lawsuit loan process. Accordingly, plaintiffs without counsel are denied lawsuit loans.
Timing
It is possible to be denied a lawsuit loan simply because of poor timing. For example, lawsuit funding underwriters need information to analyze a lawsuit for funding. If a case is too new, it is unlikely enough information is available to adequately determine the risk of loss. This is why most lawsuit funding companies are reluctant to advance money to plaintiffs less than 45 days after an accident.
Documentation
Consider a lawsuit for personal injuries sustained from a car accident. Since car accidents are generally based in negligence, plaintiffs must prove liability, causation and damages. The success of an auto accident lawsuit (and almost all others), is the ability to collect. Evidence of a defendant’s ability to pay is also required. In order to evaluate a plaintiff for a car accident lawsuit loan, underwriters need the “nuts and bolts” of the case. That is, they need a police report (liability), medical records (damages) and insurance information (ability to pay).
Car accident documentation is fairly straightforward but not all lawsuits are so easy. Consider medical malpractice lawsuits where a plaintiff needs an advance. Med Mal lawsuit funding requires copies of the following to properly consider the case for funding:
- the Complaint
- Bill of Particulars, if applicable
- Expert credentials
- Expert reports
- Insurance information
- Estimation of damages
- and more. . .
Documentation the name of the game in determining the likelihood of success for any particular lawsuit. If essential documentation is not available, lawsuit loans are generally denied.
State Law
Certain states prohibit lawsuit funding. In others, regulation renders the business unprofitable. In these jurisdictions, there is no market for plaintiffs to sell their future settlement. If a plaintiff lives in a state that prohibits the practice altogether, a lawsuit loan is denied.
Plaintiffs try outsmarting lawsuit loan companies by applying out of state. Lawsuit lenders must still verify your residency however. So, if the plaintiff lives in a “prohibited state”, he/she will be denied a lawsuit loan.
Case Equity
Case equity represents the available settlement money from which all parties are paid. For example, a lawsuit with an expected value of $100,000 without any liens or other encumbrances on the file (other than attorney’s fees), has case equity of approximately $60,000 ($100,000 settlement value – $40,000 attorney’s fee = $60,000).
These calculations are rarely that straightforward. Often, attorneys pay liens at settlement disbursement. These might include:
- expert fees
- court costs
- stenographer costs and document fees
- filing fees
- arbitration costs
- medical bills
- child support payments
- tax liens
- and more. . .
When a large amount of liens are present on a file, case equity shrinks accordingly. This affects how much lawsuit funding a plaintiff can get. In many cases, liens can limit the amount available. In other cases, low case equity can cause lawsuit loan denials.
Prior Funding
Multiple lawsuit loans can be another factor in being denied a lawsuit loan. As stated above, there is only so much “room” in a case to get everyone paid at settlement. Large funding payoffs are a common reason for lawsuit loan denials. Again, the reason is that too much is owed compared to the expected value of the case.
Consider that same $100,000 expected settlement value with the 40% attorney fee. Now add a $20,000 payoff for a previous lawsuit loan. Now add a Medicaid lien in the amount of $20,000. From the $100,000 settlement, plaintiff receives $20,000 when all is said and done ($100,000 settlement value – $40,000 attorney’s fee – $20,000 loan payoff – $20,000 Medicaid lien = $20,000).
Perhaps this hypothetical plaintiff is happy with the settlement. How happy would the plaintiff be if the liens were more and only $10,000 was his/her net amount? Would that plaintiff be likely to accept the $100,000?
Lawsuit settlements make sense for all parties. Accordingly, lawsuit funding companies go through great lengths in their analysis to make sure there is enough money left for plaintiffs at the time of disbursement. This way, everyone is satisfied. If there isn’t enough money available, then lawsuit loans are denied.
Case Type
Other lawsuit loan applications are denied because they are a specific case type. Although most cases are candidates for funding, some cases are not. Cases for social security disability benefits are not fundable lawsuits. Neither are divorce, inheritance or soft tissue cases excellent investment choices generally.
By far the most common lawsuit loan type involves claims for personal injuries. Cases other than personal injury lawsuits can be funded however. These include discrimination cases, medical malpractice, wrongful imprisonment, and employment lawsuits. Others are denied a lawsuit loan because of their specific case type.
Weak Liability
A defendant is liable when they are held responsible for something. In the case of civil lawsuits, liability means the plaintiff can hold the defendant responsible for damages.
Settlement funding contracts are all or nothing investments for lawsuit lenders. If a lawsuit is unsuccessful, the company loses its investment. For this reason, liability is a major consideration for underwriters. If liability is not found, the lawsuit fails and the settlement loan is not repaid.
Certain cases have clear liability. Consider a car accident where one car is stopped at a traffic signal and a second vehicle “rear ends” the first. Liability is easily established in this set of facts.
However, liability is not always so clear. Consider a case where a doctor is sued for malpractice. Since most medical malpractice cases are not successful, lawsuit lenders are reluctant to advance money unless liability is obvious. If not, it is likely the case will be denied a lawsuit loan.
Inability to Collect
What happens when plaintiffs sue someone with no money? What happens when there is no available insurance coverage? These issues can have a significant impact when trying to get approved for a lawsuit loan. Unfortunately, many defendants are judgement proof. This means that even if plaintiffs prevail in court, there is no money available to compensate them. Unfortunately, Plaintiffs who sue judgment proof defendants will likely be denied a lawsuit loan.
Communication
In rare instances, pre-qualified applications can die on the vine simply from lack of activity. To be approved, a plaintiff must be screened, paperwork gathered, and attorney contacted. Once approved, the case goes to the funding department. If at any point in the process communication breaks down, the lawsuit loan can be denied.
For example, a few attorneys simply will not cooperate with funding requests. Their reasons may be personal or just a matter of firm policy. Without attorney cooperation, a lawsuit loan is denied.
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What to Do If You are Denied a Lawsuit Loan
If your request for a lawsuit loan is denied, there are still some things you can do.
First, try to pinpoint the reason for the denial. If the application was denied for lack of paperwork or something similar, see if you can help secure the requested paperwork.
The second thing you can do to help your chances for lawsuit loan approval is to communicate your needs with your attorney. With your attorney on board, settlement funding runs smoothly and without complication.
Third, apply with a different lawsuit funding company. Lawsuit funding underwriting is often subjective and your denial could be related to internal portfolio considerations unique to that specific business. Finding the best lawsuit funding company is a worthwhile endeavor and can save you thousands of dollars as well.
Finally, you might also consider an alternative short term solution and reapply at a later time. Circumstances often change and become a better fit for purposes of getting support through settlement funding.
Lawsuit Loan Denial Takeaways
Legal funding exists to bridge the gap between the filing of a claim or lawsuit, and its ultimate resolution. Although some lawsuit types are not a fit for this particular financial solution, other lawsuit loans are denied for other reasons. Understanding these reasons can allow plaintiffs to avoid these roadblocks whenever possible.
If you have any questions regarding lawsuit loans or the reasons why your particular case was denied, please give us a call at 888-964-2224. You can also contact us online. We are here to help and will answer any questions you may have.
Thank you for your interest in Fair Rate Funding.
