Lawsuit Loans are Non-Recourse Funding
Although the phrase “non-recourse lawsuit loan” is commonly used to describe legal funding or pre-settlement cash advances, the truth is that most transactions involving plaintiff and lawsuit funding companies are not “loans” in the traditional sense of the word.
What are Lawsuit Loans?
Lawsuit loans are financial transactions in which a plaintiff will transfer a portion of the potential settlement proceeds to a lawsuit funding company in return for immediate cash. Although these transactions are called lawsuit loans, they are technically not really loans at all.
What is the Difference Between Loans and Lawsuit Loans?
At the most basic level, traditional loans are when a lender offers something of value to a borrower. Whether you borrow money or your neighbor’s lawn mower, the implication is that the thing of value will ultimately be returned.
Loans can be secured by collateral such as with car loans or mortgages. These are called secured loans because repayment is backed by the value of the collateral. In other words, if payment is NOT made, the collateral can be sold and repayment made based upon the proceeds of the sale.
Lawsuit loans are different because repayment is contingent upon the successful resolution of a lawsuit or claim. With a lawsuit loan, if you don’t win your case, you don’t have to repay the advance.
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What Does Non-Recourse Mean?
Non-recourse lawsuit loans means the lawsuit lender has no ability to pursue the plaintiff if the lawsuit is unsuccessful. The lender has “no-recourse” against the plaintiff personally or the ability to attach any other asset for repayment. The lawsuit is the sole collateral for repayment and repayment is dependent upon a successful outcome.
Contrast this to other secured loans like a car loan where the lender can repossess the car for repayment. If there is a shortfall, the lender can then pursue the borrower personally for repayment.
While the charge for these lawsuit cash advances is calculated by “interest” on the principal, that fact does not make the transaction a loan. In fact, if the plaintiff does not recover any monetary award from the case, the money advanced does not need to be paid back at all.
This is what we mean when we say “non-recourse”. The party advancing the money (the lawsuit funding company) assumes the risk of non-payment if there is no recovery. The company does not have “recourse” against the plaintiff personally. The company only has an interest on the proceeds of the case as a result of plaintiff’s assignment pursuant to the contract.
Why are Lawsuit Loans Non-Recourse?
When a case is approved for a non recourse lawsuit loan, the two parties entering into the agreement are the plaintiff and the pre-settlement funding company. The plaintiff has a lawsuit or a “potential claim” for damages against the defendant(s) in a case. When a legal funding transaction occurs, the plaintiff assigns his/her rights to the future proceeds of that claim, if any.
What the plaintiff does NOT do is “borrow” funds from the lawsuit financing entity. He/she simply assigns a portion of the proceeds of the case if there should happen to be proceeds at some point in the future. The assignment is essentially a sale of property rights in the potential settlement.
Lawsuit loans are non-recourse historically because of lawsuit loan pricing.
What Affects the Pricing of Non-Recourse Lawsuit Loans?
Lawsuit funding companies use non-recourse contract language because of the unique risk profile of lawsuits. The need for flexibility in pricing was the original reason why non-recourse lawsuit loans were structured this way.
In the late 1990’s, private individuals and small companies began offering advances to plaintiffs. Attorneys in many jurisdictions advanced money to clients for years. However, the practice was against many state ethics rules.
Lawsuit loans are a legitimate specialty finance niche specifically designed to fit this narrow market. Because the business was new, pricing varied greatly. Companies did not really know what to charge and plaintiffs did not really know what was fair.
Usury laws essentially capped interest rates at certain levels for regular loans to individuals. Lawsuit funders were not willing to offer their services for those prices. Using non-recourse lawsuit loans, brought the transactions outside of the usury laws so the business could find the proper pricing.
Now, pricing reflects many years of competition for market share. The result is competitive lawsuit loan rates that offer financial services to plaintiffs who need them.
Lawsuit Funding Structure Offers Flexibility
The non-recourse structure of lawsuit loans enables lawsuit lenders to offer money to plaintiffs prior to settlement. The structure allows companies to make a profit and customers (plaintiffs) to access much needed cash when it is most needed.
If you have any questions about the non-recourse nature of lawsuit loans, please contact us directly. We are here to help and are at your service.
Thank you for your interest in non recourse lawsuit loans.