settlement loans

January 29, 2020 by PMCESQ

In this post, we try to pinpoint the purpose of settlement loans.

Imagine trying to win a race to see who can chop down a tree the fastest. On one side, you stand with an axe. You have your muscles, a body full of energy and your determination. As you prepare for the race, you glare down at your opponent to psych him out. To your surprise – he is holding a chain saw. All the speed, power, and skill in the world will not prevent the inevitable, will it?

The Personal Injury Game

Unfortunately, many plaintiffs are in this very predicament with their personal injury lawsuits.

Involvement in a lawsuit is often an eye-opening experience for plaintiffs. During this time, plaintiffs are exposed to the judicial process. They get an education on how participants play the game. Many plaintiffs do not initially realize it’s a game. When they do, they understand that the deck is stacked against them. Deep pocketed insurers are their adversaries, and even the best attorneys often cannot level the playing field by themselves. Maximum recovery is the goal. To reach it, all possible tools should be used, if needed. Lawsuit funding is one tool available to plaintiffs.

Settlement loans are advances of cash to plaintiffs who need immediate financial relief, prior to settlement. Also known as lawsuit loans or lawsuit funding, settlement loans exist to help litigants in their time of need. This is the purpose of settlement loans.

The Chain Saw – the Need for Lawsuit Loans

Like the above mentioned tree chopping race, plaintiffs are simply holding an axe. The axe represents the favorable facts of the case – essentially the reason for the lawsuit. The opponent (defendant) is usually a large insurance company – they are the ones who will ultimately have to pay but they are also the ones holding the chain saw.

Taking this a step further, the chain saw is representative of the various “tools” the insurer has at its disposal. These include current laws, the judicial process, and the availability of lawyers and support staff who use these laws and manipulate the process to defend the case. The insurer has money to pay for all of these things (lawyers, paralegals, stenographers, experts, etc.) and pay for the settlement if and when that time comes. But the insurer knows money makes more money and if it can delay the payment of a claim – for whatever reason – it would have more money from which to draw a return. Ultimately the insurer is bound by contract law to pay the claim, otherwise the company will be exposed to an action for bad faith. But until that time comes – delaying a viable claim is simply another tool for the insurance company.

The Axe – the Real Purpose of Settlement Loans

The plaintiff on the other hand is on the opposite end of the spectrum. He has very little money compared to insurance companies and in the case of personal injury lawsuits, is often unable to work at all. The only tool at their disposal is the ability to access the legal system through his/her attorney. The way this is done in a personal injury case is through a contingency fee arrangement (usually 33% – 40% of the recovery). Allowing attorneys to have a stake in the case’s outcome opens up the civil judicial system to many people who would otherwise not be able to pay for a lawsuit. That’s the good news.

The bad news is that the deck is still stacked against plaintiffs. Lawyers and other legal service providers (the best lawsuit loan companies included) all make money from the lawsuit – at the plaintiff’s expense. Allowing negligence victims to become whole again is the intent of the proceedings. But this is impossible once you factor in lawyers’ fees, expenses, time, stress and any number of other “costs”. The only way to truly defray these costs is to obtain more money.

There is no substitute for an attorney’s skill, experience and expertise in obtaining a “favorable” result on a lawsuit. But frequently, financial burdens lessen plaintiffs’ ability to endure the time it takes to resolve the case. As a result, plaintiffs are forced to accept low-ball settlement offers just to pay some bills.

In response to this unfortunate reality, the lawsuit funding industry began. But the purpose of settlement loans, sometimes called legal funding, is to level the playing field by helping plaintiffs stay current on their expenses while the case is still pending. By offering cash now for lawsuits prior to settlement, plaintiffs are able to withstand the stress associated with the process and can refuse low ball offers. This frequently results in a larger recovery.

Fulfilling the Purpose of Settlement Loans

While lawsuit funding will not win the case, cash advances on lawsuits help out when plaintiffs need it the most. Properly utilized, case settlement loans allow plaintiffs to sit tight until the chain saw runs out of gas. Their attorneys can then work up the case properly and get the maximum amount available in recovery.

Thanks for your interest in learning about the purpose of the lawsuit settlement loan business.

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August 9, 2018 by PMCESQ

Settlement loans are sometimes called “lawsuit loans” by the public. Unlike a real “loan”, settlement loans are typically structured as an assignment of the future proceeds of a successful lawsuit, if any. Over the years, transactions which involve third parties’ entitlement to the lawsuits of others have been treated in various ways in a wide range of jurisdictions. This post will briefly discuss the doctrine of Champerty and its relationship to the modern settlement loan industry.

According to Black’s Law Dictionary, the doctrine of Champerty is:

A bargain made by a stranger with one of the parties to a suit, by which such third person undertakes to carry on the litigation at his own cost and risk, in consideration of receiving, if he wins the suit, a part of the land or other subject sought to be recovered by the action.

The Emergence of Champerty

There has always been and always will be people who are willing to take advantage of others. Attorneys, unfortunately are no different. Not surprisingly then, many attorneys historically utilized their leverage to take larger and larger stakes in the outcomes of legal proceedings. Maximizing compensation was the goal but this practice did not sit well with others resulting in the legal doctrine of Champerty.

The concept of Champerty eventually evolved as a “term of art” describing the situation where an entity would purchase an interest in a litigated claim. The transaction was that the purchaser paid the “pre-settlement” expenses but was also entitled to share the benefits if the lawsuit was successful.

Settlement Loans and Champerty

Historically, the most important litigation in the era of Champerty involved land. Entities which purchased a lawsuit involving real estate could acquire a partial interest in land. At the time this was deemed a windfall because the lawsuit’s purchase price usually fell far below the market price of the land at issue. In response, and since almost all of these arrangements involved attorneys, jurisdictions prohibited the practice altogether.

Champerty Evolution

The environment in which we live changed dramatically in the last hundred and fifty years in terms of population growth and technological innovation. And while negligence actions were available to plaintiffs under common law, a rapid increase in the amount of personal injury accidents saw a rise in actionable claims in the court system. Because many potential litigants could not afford costly legal fees, local bar associations allowed for the “ethical” charging of contingency fees for personal injury plaintiffs.

However, local ethics rules usually set forth a maximum for these types of fee arrangements. Undoubtedly, the ability of plaintiff attorneys to turn a profit for their services (as they should) was a primary concern. The maximum must therefore take into consideration the attorney’s ability to effectively pursue the case, the client’s interests, and the effect of unsuccessful outcomes.

Over time, legal landscape involved more diverse actions than just lawsuits involving land. Presently, there are legal actions in literally dozens of areas, each with their own nuances and procedures. The complexity of contingency fee arrangements has also evolved.

Settlement Loan and Champerty

Eventually, ancillary businesses began to fill litigants’ other needs. One example is the need for liquidity for plaintiffs involved in personal injury actions while they wait for their lawsuit to be resolved. Up until the emergence of the settlement loan business, most attempts to collect on the future proceeds of lawsuits involved attorneys. When private parties began offering advances on lawsuits, the doctrine of Champerty showed its presence once again.

In a landmark case in Ohio, (Rancman v. Interim Settlement Funding Corp., 789 N.E.2d 217,219 (Ohio 2003) the court declared settlement loan transactions void citing the doctrine of champerty. Since that time, settlement loan outfits made significant steps to differentiate their contractual terms from traditional champerty provisions.

One such step is the wording used in settlement loan contracts. Although lawsuit advances are sometimes termed “lawsuit loans”, the transaction is really NOT a loan at all. “Loaning” money to another implies repayment at a future date. Settlement “loan” contracts however, are usually deemed an assignment or sale of the future proceeds of the lawsuit, if any. In other words, if the case does not resolve favorably for the plaintiff, there is no repayment.

The transactions are thus “non-recourse” and means that only if a condition is met (the successful lawsuit), repayment is necessary. The design was originally intended for these types of transactions to fall outside of state usury laws. However, differentiating settlement loan contracts from champerty was not persuasive to the Court in 2003, possibly because the repayment terms exceeded 180% per year.

Lawsuit “lending” has since been dealt with Ohio Lawsuit Funding Regulations setting forth certain provisions designed to protect the public.

The purpose of this article is to provide background regarding the legal doctrine of champerty as it pertains to settlement loans. It also illustrates the reality facing pre-settlement funding firms – that is, their contracts may be voided at any given time by courts with varying interpretations of legal doctrine.

Thank you for your interest in the settlement loans business.

May 14, 2018 by PMCESQ

When offering a cash advance for a pending case, lawsuit funding companies analyze a wide variety of information. At Fair Rate Funding, we frequently are asked how the client can help us during the case loan process. Below is a brief outline of the steps clients can take to help obtain cash for their lawsuit.

Gather and Submit Information Relevant to the Case– Clients frequently possess much of the information needed to evaluate a lawsuit for funding. For example, if the client is requesting a lawsuit loan for a automobile accident, clients may already possess the police report, insurance information, and perhaps some medical records. In some cases, this information may be enough to render a decision on the “fundability” of the lawsuit.
Communicate with your Attorney your Desire to Enter into a Lawsuit Funding Agreement– The reasons for needing a lawsuit loan against your legal case are many. However, if your attorney does not know the situation, he/she may resist the process. Be upfront and honest about your desires and your attorney will be more willing to cooperate.
Be Patient– Lawsuit funding companies are in the business of helping clients obtain money. They only get paid if cash is advanced so the process is virtually never adversarial. You and the case loan workers are on the same team for purposes of obtaining a lawsuit loan. Help each other out and allow the workers to go through the necessary steps. Help them, help you.
Ask– Ask your funder if there is anything you can do to help. In most cases, the professional lawsuit advance worker will be able handle the process in its entirety. But, you never know when that one piece of information will make a difference in the underwriting process.
Understand– Lawsuit funding is a business and business is not personal. If your case can be funded, it will. But the underwriting process is VERY subjective. What is a great case for one legal loan outfit, may not suit the tastes of another. If at all possible, lawsuit loan companies advance cash on a lawsuit. The trick is understanding the nuances of the business and working within those parameters.
Realize You Still Have a Good Case– Even if a legal loan is not offered, that does not mean you do not have a valid claim. Your lawsuit may be so complex that a company may not want to take a chance on it. Or, there may be unresolved legal issues when you apply. Your attorney would not be wasting his time or yours if he/she thought there was no chance of recovery. You probably still have a good case despite what the underwriters think. The fact is that not every case is a good fit for funding.

The above are only a few of the possible points which potentially help a client understand the truth about lawsuit loans.

Thanks for your interest in the lawsuit funding business.

June 16, 2015 by PMCESQ

A Lawsuit Loan Offers Immediate Financial Relief to Plaintiffs Who Need Cash Now!

The lawsuit loan, also known as lawsuit funding or pre-settlement funding, is quite a unique investment. The structure of the lawsuit loan allows investors to assist plaintiffs in ongoing litigation with immediate cash to help pay their expenses while the lawsuit is litigated. Wherever there is a need, you will find entrepreneurs trying to fill that need. In any business, there are costs associated with providing the service or product. The lawsuit loan business is no different.

Occasionally, critics target the lawsuit loan industry as too expensive or predatory to those who are desperate for financial resources. Despite these claims against the cost of the lawsuit loan, the cost of the transaction simply represents the cost of providing the service for profit. Lawsuit loan “rates” are certainly larger than mortgage rates or car loans. But major differences separate these types of monetary transactions. In truth, a lawsuit loan is far different than a car loan or a mortgage – regardless of the use of the word “loan”.

Lawsuit Loan is a Misnomer

The term “loan” implies repayment at some point in the future. Car loans, home loans, and others are “secured” by collateral. That is, the car or home can be “repossessed” and sold by the lender to satisfy some or all of the loan principal and costs.

To be sure, other loans are not collateralized, and as such are deemed “unsecured loans”. Simply because a loan is unsecured however, does not necessarily mean that the lender has no recourse. In fact, unsecured debt is collected in a myriad of ways after a borrower defaults on his obligation. It is not uncommon for judgements to be entered and wages garnished in collection of unsecured debt.

Contrast this with the non-recourse nature of a lawsuit loan. In a lawsuit loan transaction, no collateral is offered. The client assigns a portion of the proceeds of the lawsuit to the funding company in exchange for a present sum of money. Because the transaction is structured in this manner, the only transfer of value for purposes of collection, occurs if the lawsuit is successful. Therefore, lawsuit loan deals are deemed “non recourse” which means the lawsuit loan company cannot collect directly from the client in the event the lawsuit is lost.

The failure of clients to be personally liable for the repayment of a lawsuit loan makes it a more risky proposition for investors. That risk must be represented in the pricing and is a major reason why a lawsuit loan costs what it costs.

Lawsuit Loan Risk Assessment Reduces Cost

15 years ago, when the lawsuit loan business was at its infancy, lawsuit loan companies charged high rates and fees for lawsuit cash advances. The cost of a lawsuit loan has decreased since that time since more historical data became available. With this data, investors were better able to assess the risk of loss and expected return. Until only a few short years ago, investors were ‘flying blind’ in an investment arena without a suitable data set of historic returns.

While cost is lower than in years past, the average lawsuit settlement loan still commands a higher cost than a car or home loan. But this is true because the two are entirely different transactions as discussed above. For example, a car loan is secured debt which means that if payments are not made, the creditor can repossess the vehicle in partial payment of the loan. Further, the lender can collect on the loan by attaching a claim on any other asset the client might own.

Conversely, a lawsuit loan is called “non-recourse” in that if there is no recovery, the advance does not have to be repaid. The lawsuit funding company purchases a portion of the proceeds of the case. So the transaction is really a asset purchase instead of a loan. If the lawsuit is unsuccessful however, the investor has NO claim against the plaintiff.

As the lawsuit funding business evolves, it becomes more efficient. Because of competition, this efficiency is reflected in pricing. And the savings are ultimately passed on to the client. Perhaps this is the most important reason why the quality of cases ultimately approved for a lawsuit loan is increasing and the price points for these “preferred cases” is decreasing.

Thank you for your interest in the lawsuit loan business.

March 5, 2015 by PMCESQ

Lawsuit Funding Buyouts Show Flexibility

Often, clients receive lawsuit funding and later need more money than their original lawsuit cash advance. Lawsuit funding companies usually give more money to a plaintiff/client with a strong enough case to justify the additional risk. But the determination is subjective. That is, the lawsuit funding company can simply refuse to advance any more money on the case.

When this occurs, the client has a choice to make. Either they find another source of money outside the lawsuit funding arena, or they find another settlement loan outfit to advance them more money.

Lawsuit funding buyouts are an option for these clients. A lawsuit loan buyout is when a second settlement loan company pays the original company in full and advances more money to the client. The advance is “re-financed” because the plaintiff now must repay only the second lawsuit lender.

Lawsuit Loan Buyouts Can Save You Money

At Fair Rate Funding, lawsuit funding applicants routinely apply for additional funding after an initial lawsuit loan is received. If the applicant received lawsuit funding from another company, we call these cases “buyouts”. This term is used because in order for a lawsuit funding applicant to receive additional funds, the prior advance must be paid in full by the “new” settlement funding company. This is because the second funding company does not want to be second in line when it comes time to repay the advance. Also, it is likely the different lawsuit funding agreements possess different terms and conditions.

Lawsuit funding for a plaintiff who has already taken a lawsuit cash advance against the lawsuit can be a tricky affair because lawsuit lenders will only advance a certain amount of money on the case. That amount is normally 8-12% of the estimated settlement value of the lawsuit. If the prior funding “payoff” is at or near this amount, no additional funding will be offered.

The Benefits of a Lawsuit Funding Buyout

Nevertheless, additional settlement loans are advanced every day. And the effects of these transactions can actually benefit the plaintiff.

Consider a plaintiff who signs a $10,000 lawsuit funding agreement which calculates the “use fee” (interest) at 3.25% per month compounding monthly. The nature of this rate structure is to lower the repayment amount in the first year and a half of the contract term. In other words, the payoff for these contracts would be cheaper for the client if the contract were to settle in the first 18 months after the advance.

Due to unforeseen circumstances, the client learns his case is several years away from getting a trial date. There could be many reasons for this but what is important to realize is that the longer the case drags on, the more interest is charged. Because the interest is calculated on the previous month’s balance, the higher balance generates a higher payoff amount. This is known as a “compounding effect”.

Contrast this to a fixed six (6) month “use fee” structure where the charge is calculated on the original contract amount and not the previous month’s balance. The “charge” for the use of the money remains the same at the end of the case as it did at the beginning. In this situation, the client may be far better off “refinancing” his existing advance with a lawsuit funding with a different rate structure.

In this situation, a buyout benefits the client by locking in an use fee that is non-compounding. The client gets more money to use at his discretion before the case is concluded and the pre settlement funding company gets a “fundable” case to invest in.

Lawsuit Funding Flexibility Allows for Creative Solutions

The flexibility of lawsuit funding to meet these needs is a real benefit to plaintiffs because there are no pre-set rules (regulations) stating what two free market participants can do when they enter into a contract (lawsuit funding agreement). As such, funding structures such as buyouts, monthly stipends, and flexible repayment terms all afford plaintiffs the ability to tailor the transaction to suit his/her needs.

Thank you for your interest in the lawsuit funding business.

October 29, 2013 by Sales

Lawsuit funding is the process of advancing money to plaintiffs in return for a portion of the proceeds of their lawsuit. The money can be used to fray the costs of litigation or to pay for daily expenses while the matter is litigated. Below are the top 5 things applicants should know when applying for lawsuit settlement loans. [Read more…] about Lawsuit Settlement Loans – Top 5 Things You Should Know

The Purpose of Settlement Loans