Lawsuit Loans Transfer Property Rights in Proceeds
Understanding lawsuit loans means understanding the difference between lending and selling something, a.k.a. a transfer of property rights. In this post, we examine the difference between personal lending and the sale of something of value. In so doing, we uncover the difference between personal loans and lawsuit funding.
Loan Basics
Essentially, personal and other “loans” are immediate advances of money received in return for a promise to repay the amount, plus interest, at some point in the future. Lenders utilize their capital to earn a return and borrowers use the money for a variety of immediate needs. Examples of traditional loans include car loans, mortgages, credit cards and more.
To complete the transaction, a borrower signs a Note which is an instrument which evidences the debt between the borrower, and one or more lenders. At the time of closing, money is transferred from the lender to the borrower with the expressed condition of when it will be repaid and what the charge (interest) will be for borrower’s immediate use of the money. Of particular importance is that there is no transfer of property rights in the money between the parties. Only possession is transferred. Lenders retain claim to the money and have various remedies available in the event the loan is not repaid according to the terms of the Note.
Understanding Personal Lending Abuses
Society realizes people under financial stress might agree to even the most oppressive terms in an effort to ease financial strain. These debtors may simply reason that it is better to deal with the immediate situation than a perhaps more burdensome situation in the future. In an effort to protect its citizens, laws are enacted to limit lending abuse. These laws set the limit on the amount of interest charged thus reflecting what society deems “fair” as it pertains to borrowing money.
State usury laws attempt to protect borrowers from unscrupulous lenders who wish to pray on people in a financial bind. Please remember usury laws deal with only loans to individuals or other entities in which there is an agreement to repay the loan at a later date, with interest.
Sale of Property
At its most basic level, the sale of property is the very foundation of economics. Even in prehistoric times, it is easy to consider a merchant selling some of his fish in exchange for bread. The sale of value is what trading is all about as both parties benefit from the exchange.
Sale of Property as a Liquidity Solution
Selling property has and always will be a means of raising cash. Property rights exist so that individuals (and entities) can store accumulated value. Thus, when an entity seeks to raise capital for any reason, they offer their property for sale in the marketplace.
Transfer of Property Rights and Lawsuit Loans
Lawsuit funding is one such marketplace where plaintiffs can sell a portion of their future settlement, prior to obtaining it. Lawsuit funding transactions which are also referred to as “lawsuit loans” or “settlement loans” provide liquidity to litigants while they pursue their lawsuit. Intentionally structured as a transfer of property rights, lawsuit loans offer immediate cash to plaintiffs with pending cases. Yet, despite their design, critics maintain the cost is high and ripe for abuse.
Critics Confusion
Lawsuit funding opponents liken pre-settlement cash advance transactions to usurious loans because they are sometimes referred to as “case loans” or “lawsuit loans“. Furthering the confusion is the use of interest charges in calculating lawsuit loan cost which are normally higher than traditional forms of lending.
If you consider a lawsuit loan a traditional loan, then their terms and conditions violate state usury laws. As discussed below however, there are major differences between traditional loans and lawsuit funding advances.
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Traditional Loans Imply Repayment
A major difference between lawsuit loans and traditional loans is that traditional loans imply repayment of the amount borrowed. In fact, in order to be considered a loan, as opposed to a gift, there is an understanding the amount must be repaid.
With a “lawsuit loan”, there is no obligation to repay the advance if there is no recovery on the lawsuit. Repayment is entirely contingent upon a successful outcome. Lawsuit loans are thus “non-recourse“. That is, the “lawsuit lender” cannot pursue repayment from the plaintiff personally in the event the lawsuit fails.
Lawsuit Loans are a Transfer of Property Rights
The most important distinction between loans and lawsuit loans is that the plaintiff has something of value to transfer in return for the money. That something is the potential proceeds of the lawsuit. Because this transfer of value, lawsuit funding transactions are structured as a transfer of property rights in the future proceeds of the case. In other words, plaintiff sells a portion of his settlement/recovery ahead of time.
Plaintiffs, especially those involved in personal injury lawsuits, often encounter financial difficulty since their injuries may prevent them from working. This cash-flow shortage is often the reason why plaintiffs may seek to sell a variety of items to raise cash.
With internet marketplaces such as EBAY and the like, sellers can raise cash through the sale of personal property. Likewise, the lawsuit funding industry provides a marketplace where the proceeds of a lawsuit can be sold.
Lawsuit Loan Critics
Lawsuit loan critics assert that deal terms are oppressive and take advantage of clients who are in desperate need of funds. However, because lawsuit funding transactions are a sale of property rights, ANY price is a ‘fair’ price for the sale of property when two willing parties agree to that price.
These same critics would probably not criticize a pawn shop because it low balls customers for their belongings or criticize a convenience store because a Coke is sold for $2.50 instead of the $.89 it costs at the grocery store. In all exchange of property transactions, there must be willing participants in the transaction. And these participants are in the best possible position to know what is or is not “fair”.
Critics may also argue the exact purchase price is not known at the time of the funding contract because the purchase price depends on how long it takes for the lawsuit to reach a settlement. But this fact fails to consider that the exact payoff amount is listed on each contract. That is, the contract terms specifically state what the payoff is during a specific time frame. There is no room for debate. The client cannot get blindsided because the numbers do not lie. Time remains a variable but the potential payoff terms are known at the time of execution.
Takeaways
Lawsuit settlement funding is specialty finance. Although the term “lawsuit loan” is sometimes used to describe these transactions, the structure of these deals is altogether different than traditional loans. Lawsuit loan transactions are a sale of future lawsuit proceeds. As such, they are a transfer of property rights in those proceeds. They are non-recourse and therefore not “loans.” The structure is by design. The intention is to offer this type of financing to the marketplace.
The option of choosing lawsuit funding as a liquidity source simply provides an opportunity for litigants to willingly explore some non traditional finance options in their search for financial relief. The popularity of lawsuit funding illustrates that this option is well received.
Thank you for your interest in the lawsuit cash advance business.
