By now, people who have never thought about litigation funding are at least tangentially aware that people can get advances or borrow against their lawsuit settlements, life insurance policies, and annuities. In recent years, aggressive advertising by some finance groups has taught people that they can “get the money now” – have almost instant access to these types of assets and do so long before they mature. Even those who were sitting on a lawsuit they were threatening to file began to wonder what it would take to profit from it without waiting years to settle.
Is it so easy for customers to have access to their future payments?
“In a few short clicks…”
There’s hardly a consumer lawsuit fundraising company website that doesn’t tout an application process that takes “just 5 minutes” or will earn the plaintiff “money in as little as 24 hours”. It can be as simple as that. Because they deal with consumers who may have little or no knowledge of the process and who often equate it with applying for a bank loan, finance companies strive to remove as many barriers as possible.
In fact, getting the process started is easier than applying for a credit card or payday loan. A candidate gets the ball rolling with just a few clicks online or a short phone call. They will provide their name and contact details and the name and contact details of their lawyer, as well as the case number and the court where the case is pending, if they have it. If the applicant’s case qualifies, and if all parties are receptive and get all their ducks in a row, an applicant can be approved in as little as a day, although sometimes it can take a little longer.
Where is the applicant?
The first consideration is the location of the potential customer. Many litigation funders advertise nationally and on the Internet, but not all do business in all states. The consumer litigation funding industry is barely more than 20 years old in the United States. The regulatory climate is changing. The federal government does not yet regulate these transactions, and most state legislatures have not caught up. Of those that have, a few treat the transactions as loans. The others have a patchwork of laws in place to regulate certain aspects of the relationship, such as how disclosures are worded and the maximum fees the company can charge. Litigation funding companies avoid states with an unsettled regulatory climate or states that have enacted unfavorable laws.
Who, or rather what, is eligible for a legal loan?
The Litigation Funding Company is not a lender in the traditional sense. He is an investor or he represents investors who expect to be paid out of the proceeds of a successful lawsuit. Considering the nature of the trial is far more important to the process than the attributes of the client.
Although the litigation funding company conducts its own due diligence, it assumes that another professional – the plaintiff’s attorney – has determined that the case has merit. In fact, almost universally, to tap into a funding source prior to settlement, the plaintiff must have a lawsuit or action pending and be represented by an attorney. Some litigation funding companies offer advances on claims in class action suits, large bankruptcy cases, or claims against large settlement funds like those set up to compensate people after a disaster. For these, the plaintiff usually does not have their own attorney, but these are relatively rare in the litigation funding industry.
Either way, there must be an underlying claim that has merit and has already been documented in some way. The need for this is easy to understand once you consider the nature of the transaction. In a trial, the plaintiff’s attorney will do their due diligence before deciding whether to bring an action. It will investigate the claim and assess its viability and value. She will also judge her client’s motivations and willingness to undertake the rigors of litigation, which may include depositions, series of written findings, motions, hearings and settlement negotiations, all experienced long before a trial is scheduled. As most attorneys know, personal injury litigation is not for the faint of heart. Finally, the attorney will assess the defendant. It helps if the defendant is a large business or insurance company involved – the type of defendant most likely to make rational business decisions about the dispute and have the resources to pay a settlement or judgment.
Personal injury, Yes — Family law, No
Qualifying cases or claims generally arise from bodily injury, but may involve cases outside the realm of your typical 18-wheeler accident or a slip and fall at the local big box store. Depending on the funder, they could include employment discrimination, civil rights, product liability, unsafe drugs, or defective medical devices, virtually any case that will result in a cash reward. Some lenders will consider cases that don’t fit a typical personal injury pattern, such as a contract or deceptive business practice case. Lawsuits that do not lend themselves well to litigation funding include those that require non-monetary resolution, such as specific execution or a temporary restraining order, domestic relations issues such as disputes over marital property settlements, those that seek equitable remedies such as property division or probate issues.
No credit check
In traditional loans, the credit check is a significant obstacle for some potential borrowers. Many applicants, who are often unemployed and plagued by injuries, cannot qualify for credit or choose to avoid the expense and impact on their credit scores. This is not an issue in litigation funding. The funder appears to be paid from the proceeds of the settlement or the judgment amount if the case goes to trial. Even if the matter does not settle, settles for less than the amount of the advances, or is not resolved at all in favor of the plaintiff, the funder has no recourse against the plaintiff. There is no point in getting a report to track the creditworthiness of someone who has no personal liability.
Once the lender has gathered all the information about the lawsuit, the case is passed to the underwriter who assesses the strength of the application and determines whether to approve the application and for how much.
The amount of the advance depends on how much the applicant needs, how he intends to use the advances (living expenses, medical treatment, debt reduction), the value of the lawsuit, how long it will take to resolve it, the reputation and experience of the plaintiff’s lawyer, whether he provides a single advance, a series of advances or regular monthly payments. On average, claimants will receive 10-15% of the value of the claim.
Lawsuit lenders do not charge for an application. They do not require any of the advances to be repaid before the case is resolved. The plaintiff will sign an agreement with the litigation funding company that includes repayment of advances and payment of additional fees on the product. This fee can be a fixed amount or a percentage of the payment. Although these transactions are not loans, and the funder does not charge interest in the traditional sense, depending on the jurisdiction, the fees may include a premium for the time it took to settle the matter or render a judgement.
The applicant must of course sign the agreement and in most cases the funder will also require the lawyer to consent to the client’s request for funding. In all jurisdictions, plaintiffs have the right to apply for court loans, but so far few states require the litigation funder to obtain consent from the attorney. Since the funder normally looks to the attorney to ensure that the finance company is paid from the proceeds of the settlement, most companies require that the attorney – who is already aware of the client’s desires – signs the arrangement. This is similar to the duty a lawyer owes on a letter of protection to a doctor who agrees to waive payment until the case is settled.
Customers who choose to take out court loans are more likely to go the distance with a case. The conventional wisdom is that plaintiffs will wait for a higher settlement or even go to trial if they are not experiencing economic stress and their physical issues, like medical issues, have already been resolved. It makes sense that they consider their options more rationally when they’re not hungry and the rent is paid.
When the case is finally settled or a judgment is rendered in favor of the client, the lawsuit loan is paid according to its terms, just as the lawyer receives his contingency fees, litigation costs such as court reporters and witnesses experts are reimbursed and medical professionals are paid on their letters of protection. The rest, as in any other personal injury case, is up to the customer. The client was able to enjoy part of the settlement long before the final payment, plus a certain amount of proceeds after the case was settled. Kind of like having your cake and eating it too.
© 2022 Copyright Tribeca Lawsuit LoansNational Law Review, Volume XI, Number 218