The Pros and Cons of Lawsuit Funding
One misconception we always hear from attorneys is that they get nothing from a client or plaintiff receiving an advance. True and untrue. True to the point that it is illegal for an attorney to benefit financially from a client receiving an advance. Lawsuit funding companies are not allowed to pay an attorney anything to get their client to receive an advance.
But, it is 100% untrue that an attorney ultimately will not benefit from their client receiving an advance. One of the main reasons a plaintiff should think about getting a lawsuit advance is in order to get the full proceeds from what a case is worth. Let me give you a quick example of what I mean. An attorney is working on a personal injury case and receives an offer of $20,000 from the insurance company. The attorney feels that the offer is about 20% of what the true value of the case is actually worth – i.e. $100,000 – but has an obligation to report the offer to his/her client. The client wants to take the $20,000 offer and does not care if the case is worth $100,000. The client needs the money now and cannot wait another 6-12 months for the case to settle. They are now 3 months behind on their rent and a $20,000 settlement is looking great for their current needs.
This is a perfect case when lawsuit funding can help not only a client’s current needs but the attorney’s as well. Lawsuit Funding can enter the picture and help the client catch up on the 3 months of rent and other bills that are becoming major problems. By getting an advance of a few thousand dollars now, the client can hang in there and wait for his/her attorney to try and get the true value of the case = $100,000.
So how does that help the attorney? Most attorneys get a fee on the case between 30-40%. Let’s take the low end at 30% to keep it simple. If the client’s case settles for $20,000, then an attorney is going to get a fee of $6,000. But, if lawsuit funding is able to allow the client to pursue and obtain the settlement they deserve at $100,000, then an attorney’s fee jumps from $6,000 to now $30,000. That is an extra $24,000.
Now to the negative aspect of lawsuit funding. Lawsuit funding is not cheap. If a plaintiff borrows $5,000 and the case settles in 6 months, a plaintiff would owe around $6,000 on their advance. That’s an expensive loan. Whereas most banks charge around 6% per year and credit cards charge around 18% per year, lawsuit advances charge in the 30% range.
Why so much? The simple reason is a lawsuit advance is a non-recourse loan meaning the plaintiff owes nothing if they lose their case. The lawsuit funding company’s collateral is the case and the case alone. If the case goes South, the funding company is out their advance amount. In turn, these companies will charge a higher interest amount. A good rate for a lawsuit advance is 2-3% per month or 24-36% per annum. There are national companies that will charge outrageous rates of anywhere between 4-5% per month or even higher. These are the companies a plaintiff needs to be careful of. These companies prey on the desperation of a plaintiff who does not care what they are getting charged but only care about getting their rent paid, their heating bill paid, or putting food on the table.
This is why plaintiffs need to be very careful and to do their homework on what company they are choosing funding from. The plaintiff needs to truly have to have an immediate need for a lawsuit advance. If a plaintiff is planning on using this funding for a new TV or to go on a vacation, a lawsuit advance is not right for them.