It is unfortunate that siren chasers still exist in the legal industry. Yet they do. A recently emerging trend in this arena is the aggressive marketing of something known as “lawsuit funding.” It is essentially offering loans for pending lawsuits to plaintiffs in dire need of cash as they wait for their cases to be settled. Lawsuit funding has been likened to cash advance and payday loans, two kinds of loans that are not looked too favorably upon by financial experts.
A 2013 report from FOX Business indicates that lawsuit funding dates back to the late 1990s. Though not many people have heard of it, the industry was worth some $100 million in 2013. Lenders provide loans to plaintiffs with the expectation that they will be repaid, with hefty interest included, when an award comes through.
Legal but Questionable
Make no mistake; lawsuit funding is legal, albeit questionable in the eyes of some within the legal industry. That said, obtaining loans in advance of pending lawsuits is a pretty straightforward process.
Upon filing a lawsuit (usually a personal injury claim), the plaintiff applies for a loan with a funding company. A loan officer reviews the plaintiff’s case to determine the likelihood of winning and, in such a case, the size and probability of an award. The loan officer also takes into consideration that the vast majority of personal injury cases are settled before they go to court. Approving the application results in the loan officer making an offer to the plaintiff for a certain amount of money.
If the plaintiff accepts the offer, he or she essentially agrees to borrow the money with a commitment to repay it out of the proceeds of any eventual award, plus interest. This is where things start to get questionable. Interest on lawsuit funding averages between 2% and 4% monthly. Based on a comparable APR, that works out to between 27% and 60% annually.
Why Take Loans against Pending Lawsuits?
In a typical personal injury case, things such as attorney’s fees and court costs are deducted from the award before any cash is given to the plaintiff. And more often than not, personal injury lawyers do not charge their clients unless they win. So why access lawsuit funding? Why borrow money if a court award will pay the costs of going to court?
People are sometimes tempted by lawsuit funding as a means of meeting medical bills or replacing lost income. This is no small temptation. Personal injury cases can take months to settle or, in some particularly difficult cases, even years. Being saddled with medical bills during that time can make life unbearable. Things are made worse if a plaintiff is unable to return to work as a result of injury.
Lawsuit funding is a financial tool with its proper time and purpose. It may be right for some accident victims who absolutely need cash because they have no other options. Nevertheless, for most plaintiffs, such funding is unnecessary and inappropriate. It just does not make sense to pay such exorbitant interest rates while you sit and wait for your case to be settled. There are other means of meeting your financial needs including personal loans, credit cards, and assistance from friends and family.
If you have any questions about lawsuit funding for pending lawsuits, please do not hesitate to contact our law offices. We will do our best to assist you in resolving your legal matter.