Lawsuit Loans and Advances

Understand the cost before borrowing against a potential lawsuit recovery.

For someone severely injured by another’s negligence, finances can often get very tight. The medical bills add up, the rent still needs to be paid, and there’s a family to feed. Lost time from the job can mean little or no income to offset those mounting expenses, making it even more difficult to borrow money through traditional means. Meanwhile, the personal injury lawsuit to recover damages for medical expenses, lost wages, and pain and suffering is moving at what seems like a snail’s pace. How can an injured person keep afloat until the case is settled or a verdict is reached?

Fast cash! Lowest rates! Pay only if you win!

A relatively new entrant in the “fast cash” industry is the lawsuit loan, or lawsuit funding. Started in 1997, the industry has grown to an estimated $1 billion worldwide. The concept is simple: the client borrows money today and pays it back – with interest – at some point in the future, depending on the case outcome. Hopefully, there’s a recovery, either by settlement or judgment from a court. If not, the terms of the borrowing agreement will govern whether the lender has the right to pursue the client for the money owed.

For clients: understand the potential long-term costs of lawsuit loans

The main issue reported about lawsuit loans is that the high risk of legal claims results in high interest rates charged by the lenders. As an example, one of my clients borrowed about $12,000 during a personal injury lawsuit. When the suit finally settled more than two years later – not unreasonable for this type of lawsuit – the client owed about $45,000. That’s 375% interest, and those high rates can make negotiating a settlement much more difficult.

After working with a number of clients who have needed to borrow money from lawsuit lending companies, I’ve developed a few rules of thumb for clients to consider:

• Stay away unless it’s a life or death situation. Your best option is to borrow the money from friends, family, or banks. Use lawsuit loans only as a last resort.
• Borrow only what you need right now. While it may seem tempting to take more money if it’s offered, you may not end up with any recovery if you accept too much today.
• Understand the timing of your case. Many lawsuit loan companies charge monthly or quarterly interest or fees. If your case is slow to resolve, you may end up with nothing. In the current economy, it is unwise to expect your case to proceed quickly to a settlement, no matter how clear you think liability and your damages are.
• Read the fine print. Before you sign, make sure you understand the fees, interest rates, and repayment calculations. For example, some firms don’t charge monthly interest, but instead assess a flat fee and a contingent percentage of the recovery amount. If you’re not careful, you may end up owing more than you receive from your lawsuit.

For lawyers: understand the potential impacts to your client relationships

Although it’s the client’s obligation to repay the lender, lawsuit loans may jeopardize your client relationships by placing you in the middle of an impossible situation. Assuming you’re aware of a lien against the final judgment, when the check arrives you are required to follow GA Bar Rule 1.15(I) and honor that third party’s interest. There may not be much left to disburse to your client, or the client may actually owe more. Some lenders may refuse to negotiate the amounts owed. Now the client is upset, and there’s not much you can do until it’s time to respond to the potential Bar grievance.

Lawsuit loans may also force a case to trial rather than settlement, or vice versa. The lender wants its money, and your client refuses to take less than a certain amount. This may impact important strategy decisions, and could put you at odds with your client. Here are a few ideas that may help you minimize the use and impact of lawsuit loans:

• Keep your distance, if at all possible. Think twice before recommending a lawsuit loan company. The more you involve yourself, the stronger your obligation to resolve any issues later should they occur.
• Put it in writing. If your client must borrow from a lawsuit loan company, consider amending your agreement, documenting your client’s acknowledgement that the loan and lien cannot and will not impact your relationship, the case, or your fee.
• The terms may be negotiable. Ultimately, the loan company wants its money back, plus something extra. There may be some flexibility to adjust fees so your client’s best interests are served. Tell your client to shop around for the best terms, and it never hurts to ask for an adjustment if it will help settle the case.

States are starting to take notice

Beyond the high cost, lawsuit loans introduce an unnecessary level of complication and financial pressure in a personal injury lawsuit. As a general rule, stay away from them unless it’s absolutely necessary, and even then only proceed when you understand the potential negative impacts. Several states have already started to regulate lawsuit lending like other financial products. Expect more to follow.

Join Chandler Law’s LinkedIn group: Attorney Ethics and Professional Liability.