Lawsuit Loans

Lawsuit Loans: The bad & the ugly

While the notion of up-front cash, particularly for those who have suffered serious, debilitating injury, can be an alluring prospect, unfortunately the terms of many lawsuit loans are more reminiscent of the financial shenanigans of payday lenders than the altruistic purposes they sometimes purport to serve. A great many lenders of lawsuit loans prey upon vulnerable individuals, many of whom are teetering on the verge of bankruptcy, giving borrowers the cash they so direly need up front but then charging exorbitant fees and interest rates on the back end, oftentimes leaving the borrower-plaintiffs worse off financially than they were in the first place. 

It is no secret that one of the biggest hurdles facing the average person seeking legal recourse through the courts is the sheer cost of hiring an attorney and the support staff necessary to mount an effective case. In personal injury and products liability cases, in which the defendants often are deep-pocketed corporations with either in-house counsel or large outside law firms on retainer, the financial prospects can appear so daunting that many plaintiffs opt not to bring a case at all. This often makes the prospect of a taking out a lawsuit loan an appealing one. 

However, with many lawsuit-loan lenders being controlled by speculative, profit-driven investors and operating under a relative lack of government oversight and regulation, one needs to be appropriately skeptical in order to protect oneself and family from overly onerous terms. 

Here are some important things to remember: 

1. Lawsuit loans ARE NOT the same as a lawyer’s contingency agreement.

Given the language used to market lawsuit loans, one could be forgiven for confusing a lawsuit loan with a lawyer’s contingency agreement, except that the lawsuit loan offers the plaintiff some money up front, as well. In many cases, this could not be further from the truth. 

In a typical contingency agreement, a lawyer will agree to take on a client’s case for little or no money up front, instead agreeing to take a certain percentage of any monetary awards received on the back end. In these kinds of contingency agreements, the lawyer assumes a great deal of the risk: if the lawyer does not win or settle the case, the client does not pay. And, in the event the lawyer does succeed in getting the client a cash award, the attorney typically receives about one-third of the total amount, plus reimbursement for expenses incurred, such as court fees. 

Similarly, a lawsuit loan only is paid back if you receive monetary compensation for your legal claim. However, a key difference is that a lawsuit loan accrues interest, and, with rates running as high as 98% per year, by the time one does receive just compensation for his or her injuries, much of that money will be going to repay the lawsuit loan. 

2. Even at the lower end of the interest-rate spectrum for lawsuit loans, interest adds up quickly.

To give a concrete example of just how much one can end up paying in interest on a lawsuit loan, The New York Times has described the following situation: 

“Ardec Funding, a New York lender backed by a hedge fund, lent $45,000...to a Manhattan lawyer hired by the parents of a baby brain-damaged at birth. The lawyer hired two doctors, a physical therapist and an economist to testify at...trial. The jury ordered the delivering doctor and hospital to pay the baby $510,000. Ardec is collecting interest at an annual rate of 24 percent, or $900 a month, until the award is paid.”

In other words, the borrower-plaintiff in this scenario owed $10,800 per year in interest alone on the original lawsuit loan of $45,000, meaning that in a little over four years—hardly an unheard of amount of time for litigation to last—he or she would owe in interest 100% of the original loan amount, with the loan’s principal balance plus lawyers fees and other costs still to be deducted on top of that. The end result can be surprisingly little money left for the plaintiff-borrower. 

3. The costs of lawsuit loans are not limited to interest rates. Remember to check for hidden fees and other expenses. 

Despite the high interest rates, the costs of a lawsuit loan to the borrower-plaintiff often are not limited to interest charges. 

“In some cases, borrowers may also pay broker fees on advances,” according to the CNBC report. “The website of Cash4Cases says it pays ‘referral fees’ of up to 25 percent.”  

4. Remember that the lenders of lawsuit loans are not charity organizations. Often, they are speculative enterprises funded by profit-driven investors, so it is important to protect oneself accordingly.

The concerns over lawsuit loans are not new, and yet as the industry continues to grow, it has remained largely unregulated, meaning that lawsuit loans and the lenders who make them are not covered by the same kinds of vigorous consumer protections that govern other types of loans and lenders. This means that borrower-plaintiffs need to be even more careful when dealing with lawsuit loans than with other kinds of credit. 

For example, far back as 2010-11, The New York Times published a series of articles highlighting the risky nature of lawsuit loans for borrowers and describing how lawsuit loans had become an area of speculation for wealthy investors. 

“Large banks, hedge funds and private investors hungry for new and lucrative opportunities are bankrolling other people’s lawsuits, pumping hundreds of millions of dollars into medical malpractice claims, divorce battles and class actions against corporations — all in the hope of sharing in the potential winnings,” The Times reported articles in 2010. 

Yet, in nearly a decade since The New York Times’ reports, the lawsuit-loan industry largely has managed to avoid government oversight, as the wealthy, politically powerful forces profiting off the practice have pushed elected officials throughout the country to maintain the regulatory leniency they have so far enjoyed. 

“Companies that advance money to plaintiffs involved in personal injury lawsuits are campaigning in state capitals for legislation making clear that their growing industry is not subject to usury limits on interest rates or other state laws that protect borrowers,” according to The New York Times. “Instead, the lawsuit lending companies want to adopt a separate and less rigorous set of protections. Since February [2011], they have persuaded legislators in at least five states, including New York, to introduce bills based on the industry’s own proposals.”

Perhaps unsurprisingly, the most prominent voices opposing such measures have not been plaintiff and consumer advocates seeking to protect the vulnerable from unscrupulous speculators, but rather chambers of commerce and insurance-industry lobbyists who fear an increased number of lawsuits brought against their members and clients should plaintiffs have access to the funds to mount an effective case.