When faced with mounting bills and insufficient income, many plaintiffs (particularly in personal injury cases) want to borrow money against the proceeds they expect to get from the lawsuit—called lawsuit funding, settlement funding, lawsuit loans, or lawsuit cash advances.
While lawsuit loans can tide you over if you're unable to cover living expenses and other costs during your lawsuit and might provide you with time to negotiate a favorable settlement. But they're not always a wise choice. Here's why:
Also, consumer advocacy groups have strongly opposed lawsuit lending or have actively proposed regulating it on behalf of consumers. In their push for more regulation, these consumer groups have found themselves aligned with entities not necessarily known for their consumer advocacy, including insurance companies and business groups like chambers of commerce. These pro-business groups oppose lawsuit loans because of their concern that this kind of lending encourages litigation by making it easier for plaintiffs to hold out for higher settlements.
Filing suit can be an expensive and time-consuming enterprise. If your injury causes you to lose income or incur unexpected expenses like medical bills, your financial situation might get much worse before you settle your case or win a judgment.
If you find yourself in this situation, you might be considering a lawsuit loan or lawsuit cash advance to help alleviate financial stress while waiting for the lawsuit to settle. With a lawsuit loan, a lawsuit funding company buys your right to all or a portion of your lawsuit award or settlement in exchange for an advance you receive while the case is still pending.
Below are the two main advantages of lawsuit cash advances.
Lawsuit loans can provide much-needed breathing space if you're unable to cover living expenses, mortgage payments, car loan payments, and medical bills during your lawsuit.
If you're depending on the settlement or award to provide income or pay for needs like medical bills, taking out a lawsuit loan might allow you to take more time considering settlement offers. As a plaintiff, your goal shouldn't be to prolong the litigation but to obtain a fair result. If a lawsuit loan helps relieve financial stress, you might find that you and your attorney can take more time to negotiate with the defendant. If the defendant isn't offering a fair settlement, a lawsuit loan might give you the financial wherewithal to go to trial.
Even if you need cash, a lawsuit loan might not be a wise choice for you. Below are some of the main cons to taking out a lawsuit cash advance.
When you pay the lender out of the settlement or judgment proceeds, you'll pay back the principal you borrowed plus a funding fee or interest payment that could be double or triple what you borrowed from the lender. But you won't have to pay more than your settlement or award.
It is not unusual for personal injury cases to take months or even years to settle or come to trial. The interest rates on a typical lawsuit loan can run between 27% and 60% a year, comparable to some payday loans. On a $25,000 loan, the interest can cost you $12,500 or more in just one year. Because the interest is usually compounded monthly, if the case takes two years to settle, you'll pay back a whopping $32,000 in addition to the $25,000 you borrowed.
You will save yourself considerable money in the long run if you can avoid taking out a lawsuit loan in the first place. Consider other resources, like insurance proceeds, disability payments, or even friends and relatives. It might be worthwhile to approach your credit union or neighborhood bank for an installment loan. Borrowing against the equity in your house or your 401(k) account should probably be a last resort. They might be a less expensive alternative in the short run, but you risk losing your house to foreclosure or your retirement if you can't pay back the loans as agreed.
Because the lending company is taking a substantial risk, it only lends when it is confident that you will win or settle your case. If you lose, you won't have to pay the loan back. If you win less than the lending company expected, you might not have to repay the entire amount. So, the lender will want to ensure that your case is likely to pay off handsomely. Because lawsuit lenders are picky about the cases they accept, plaintiffs often report having to apply to five or six different companies before they find one interested in funding their case.
Unlike other types of lending, lawsuit loans aren't regulated by the federal government, and only some states have put into place consumer safeguards. The lawsuit lending industry argues that lawsuit funding is not a loan and that the usual laws and regulations applying to loans shouldn't apply to them. According to the lawsuit funding industry, lawsuit loans aren't actually "loans" because they are nonrecourse, meaning plaintiffs don't have to repay the money if they lose the case. Instead, they characterize the transactions as nonrecourse purchases of a portion of the proceeds of a potential future case judgment or settlement.
Using this argument, lawsuit lenders have convinced some state legislatures not to regulate their products as if they were traditional loans. Though, certain courts and some states require lawsuit lenders to comply with state lending laws or otherwise regulate lawsuit lenders. For example, a 2015 decision by the Colorado Supreme Court determined that these kinds of agreements are, in fact, loans and subject to state lending laws. To find out about lawsuit lending laws in your state, if any, talk to an attorney.
In addition, few restrictions exist on how much lawsuit funding companies can charge for their services and few requirements as to how interest rates and other terms must be disclosed. So, it's problematic to find and compare rates and other terms or find the disclosures you need to make an informed decision on the best loan or lending company for you. Even the vocabulary might differ from website to website. One company might advertise its product as a "loan," while another will call it an "advance."
Without widespread regulation of the lawsuit lending industry, it's hard to know which companies are treating their customers fairly. With little government or industry oversight, it might be even more difficult to get satisfaction if you think you've been treated unfairly. Looking for a company that subscribes to a list of best practices or rules governing the client relationship might be a start. Services like the Better Business Bureau might provide insight with reviews and complaints.
Because lawsuit loans have few consumer protections, you need to be extra vigilant if you're considering this type of funding. Understand what the loans are, carefully consider whether such a loan is a wise financial decision in your situation, and if you decide to look for a loan, shop carefully.