If you are considering taking out a lawsuit funding or financing, we would like to tell you about a surprising and new alternative: It’s called, “Anything Else”! Clients with personal injury cases sometimes ask us, should I apply for lawsuit funding? And we always try to explain how lawsuit loans are a really bad idea and that they should explore all other options before applying for any kind of lawsuit financing. Below, we discuss what these loans really are and why they are usually a very bad idea.

What is lawsuit funding?

Lawsuit funding sometimes called lawsuit financing or lawsuit loans, are non-recourse loans that a person only has to pay back if they recover money from their lawsuit. At first, this may sound like a good idea – get your money today rather than wait for the end of the case. But really, it’s a horrible idea. Because the finance company does not run a credit check and only gets paid back if you win money, they have to charge exorbitant fees and interest rates to compensate themselves for the risk. Also, they will not loan someone an amount even close to the value of their case. Generally, they will only loan a small fraction of the case’s true value. Also, because they are offering lawsuit financing and not regular loans, they are exempt from many consumer protection laws. Fox Business recently published a great article exposing the truth about lawsuit financing. Clients often will incorrectly assume that they are just getting part of their settlement money now instead of later. But really, the funding company is giving them a little money now and will take a whole lot of money later on.

Why is lawsuit funding so bad?

Matt Fullenbaum, director of legislation for the American Tort Reform Association, a Washington, D.C., explained it plainly:

Litigation funding companies charge their customers exorbitant fees. Such fees are considered usury in most contexts, but because the litigation funding company provides a non-recourse feature, they maintain that these transactions are not subject to banking rules, regulations and lending laws.

And that is the big problem with lawsuit funding/loans – the incredibly high fees and interest rates. In many cases, a personal injury client could end up paying 100% interest per year! That means that if you get a settlement you can easily owe about three times as much as you borrowed. For example, in this New York Times article, a New Jersey resident applied for funding on his case – after initial “fees” the funding was in the amount of $10,500. About 2 years later when his case settled, he received a bill for almost $36,000! At that point, a plaintiff could wind up getting nothing from their personal injury case, while all of the money goes to the funding company.

Normally, these types of interest rates would be prohibited by law. But the funding companies insist that these are not “loans” but rather “cash advances” or “funding options”. No matter what you call it, the process takes advantage of the poor and/or unsuspecting, which is why we give the below advice.

What should I do if I am considering lawsuit funding?

If you are considering lawsuit funding/financing then our first piece of advice is this: Consider anything else! That’s right, if you are in a jam then you should consider any other possible alternative. Use a credit card, borrow from family/friends, get another job – really anything is a better alternative. If you have been living for years with financial issues, and now you want funding on your lawsuit just to ease your burden, then you should not apply for the funding.

However, there are sometimes situations when a plaintiff, in the middle of the case, has a real legitimate need for money, it truly is an emergency, and there truly are no other options. In such a case, the client may need to get funding as an alternative to homelessness, for example. If that is the situation then we would advise that the client read the funding documents very, very carefully. In particular, you want to look at the documents breaking down all of the fees and explaining the interest rates. You would also want to keep in mind that they typically do not tell you what the annual interest rate is – they tell you a monthly rate so that it doesn’t sound like you are doing business with a loan shark. Keep that in mind and be careful not to ruin a good case with a bad funding decision.

(Special thanks to John Oliver who inspired us to write this piece)