In my law practice, I have always advised clients not to obtain a “lawsuit loan” unless they have absolutely no financial alternative.
For those not familiar with the concept, there are companies which will loan plaintiffs money against an anticipated settlement or judgment. The good thing about these loans is that should you lose your lawsuit, you do not have to repay the loan (at least this is the case with all the companies with which I am familiar). The bad news is that you will be charged an extremely higher interest rate than what you would see at a bank. I’m talking “worse than credit card cash advance” interest rates.
On some of the proposals I’ve seen, a $3000 lawsuit loan can, just 7 months later, have a payback amount of more than $4200. That’s $1200 less the client will receive if the case settles just 7 months later, and the payback amount continues to increase until the settlement is disbursed.
Why Would Someone Take Out a Lawsuit Loan?
Personal injury plaintiffs often miss work, and sometimes lose their jobs entirely, due to their injuries. Their bills don’t stop coming just because they’re hurt. And let’s face it — lawsuits can take a long time to resolve, sometimes years. When a plaintiff has exhausted all other means of borrowing, a lawsuit loan may be the only way to pay their mortgage/rent or put food on the table. If this is your circumstance, then a lawsuit loan may be your only option. On the other hand, if you are merely impatient or you want some money for Christmas or birthday presents, you would be a costing yourself money later down the road.
Aside from a lawyer’s general misgivings about the wisdom of a client taking out a lawsuit loan, the companies that issue these loans require lawyers to fill out a bunch of forms and provide supporting documentation about your case before they will consider lending you money. Not a big deal, but this adds some extra work to the case that doesn’t increase the settlement or verdict value.
If your lawyer has never dealt with one of these types of loans before (these are not routine) there will be ethical questions he or she will need to research before filling out the loan paperwork. Be patient if your attorney can’t turn around the paperwork the same day.
Keep in Mind that the Loan Money You Get Now Will Reduce What You Get From Your Settlement Later
It may seem obvious to point this out, but many clients who take out these loans seem to discount them when it comes time to settle their case. This is probably because the loan money is long gone months before a good settlement offer comes in. Plaintiffs tend to have a dollar amount in mind as to their final “take home” on a lawsuit, and it is all too common for that number to remain unchanged even after a loan is taken out.
This is another reason lawyers don’t like dealing with these kinds of loans. Lawsuit loans can make cases harder to settle.
Now, in addition to attorney’s fees, costs, and medical bills being deducted from the gross settlement, you have a loan plus interest to deduct as well. Some plaintiffs will try to offset their loan expense by holding out for an unreasonably high settlement offer.
Who to Use for Your Lawsuit Loan?
Assuming you read the above, and are dead set on getting one: Call a few, and go with whichever company offers you the best deal. If you absolutely need a lawsuit loan, only borrow as much as you need. The lender may offer more, but resist that temptation. You can always go back to them and ask for more if you need it later. Find out beforehand if they charge a “processing” fee for each transaction.
Keep in mind that it’s common for lawsuit companies to deny funding. They want to make sure they’re not just throwing money away. If your case has pitfalls, and is unlikely to settle or be successful at trial, don’t be surprised if the funding company denies your request.