Lawsuit Funding “Buyouts” Illustrate the Industry’s Current Flexibility
Often, clients receive lawsuit funding and later need more money than their original lawsuit cash advance. Lawsuit funding companies usually give more money to a plaintiff/client with a strong enough case to justify the additional risk. But the determination is subjective. That is, the lawsuit funding company can simply refuse to advance any more money on the case.
When this occurs, the client has a choice to make. Either they find another source of money outside the lawsuit funding arena, or they find another settlement loan outfit to advance them more money.
At Fair Rate Funding, lawsuit funding applicants routinely apply for additional funding after an initial lawsuit loan is received. If the applicant received lawsuit funding from another company, we call these cases “buyouts”. This term is used because in order for a lawsuit funding applicant to receive additional funds, the prior advance must be paid in full by the “new” settlement funding company. This is because the second funding company does not want to be second in line when it comes time to repay the advance. Also, it is likely the different lawsuit funding agreements possess different terms and conditions.
Lawsuit funding for a plaintiff who has already taken a lawsuit cash advance against the lawsuit can be a tricky affair because lawsuit lenders will only advance a certain amount of money on the case. That amount is normally 8-12% of the estimated settlement value of the lawsuit. If the prior funding “payoff” is at or near this amount, no additional funding will be offered.
The Benefits of a Lawsuit Funding Buyout
Nevertheless, additional settlement loans are advanced every day. And the effects of these transactions can actually benefit the plaintiff.
Consider a plaintiff who signs a $10,000 lawsuit funding agreement which calculates the “use fee” (interest) at 3.25% per month compounding monthly. The nature of this rate structure is to lower the repayment amount in the first year and a half of the contract term. In other words, the payoff for these contracts would be cheaper for the client if the contract were to settle in the first 18 months after the advance.
Due to unforeseen circumstances, the client learns his case is several years away from getting a trial date. There could be many reasons for this but what is important to realize is that the longer the case drags on, the more interest is charged. Because the interest is calculated on the previous month’s balance, the higher balance generates a higher payoff amount. This is known as a “compounding effect”.
Contrast this to a fixed six (6) month “use fee” structure where the charge is calculated on the original contract amount and not the previous month’s balance. The “charge” for the use of the money remains the same at the end of the case as it did at the beginning. In this situation, the client may be far better off “refinancing” his existing advance with a lawsuit funding with a different rate structure.
In this situation, a buyout benefits the client by locking in an use fee that is non-compounding. The client gets more money to use at his discretion before the case is concluded and the pre settlement funding company gets a “fundable” case to invest in.
Lawsuit Funding Flexibility Allows for Creative Solutions
The flexibility of lawsuit funding to meet these needs is a real benefit to plaintiffs because there are no pre-set rules (regulations) stating what two free market participants can do when they enter into a contract (lawsuit funding agreement). As such, funding structures such as buyouts, monthly stipends, and flexible repayment terms all afford plaintiffs the ability to tailor the transaction to suit his/her needs.
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