Loans for Lawsuits: Litigation Financing Basics

You may find the only answer to your legal problem, such as a personal injury claim, is a lawsuit. The stakes are high on both sides in terms of resources - time, money and your emotional and physical state. Even if your case never goes to trial, settlement of your claim may not come fast enough. The entire process can be expensive, and you may have personal financial needs as well. Where might the money come from? Lawsuit or litigation funding.

What Is Litigation or Lawsuit Funding?

Providing financing for lawsuits is a relatively new financial product type. The concept is you, as a plaintiff in a lawsuit, obtain a loan against the expected payout or proceeds from your legal claim. Most, often it's a personal injury lawsuit arising from a car accident or other common negligence claim. Funding for commercial lawsuits is available, too.

Funding Types

Funding is available at several stages of your lawsuit: pre-settlement, post-settlement and buyout of your structured settlement. Pre-settlement funding is used when you're expecting your legal claim to settle, or you're going ahead with a lawsuit. Post-settlement funding is an option when you've received a settlement or judgment, but you might not be able to wait to receive payment. Buyouts of structured settlements offer the chance to sell your structured settlement annuity from your personal injury case for a lump sum payment.

Why Do I Need a Loan?

Many people find their personal injury or other lawsuit timeline doesn't line up with their personal financial needs. While your attorney may take your case on a contingent fee basis, you'll still have to cover costs and other expenses related to your lawsuit.

The reason behind your case, your personal injury, for example, may have affected your income or ability to work. Your income stream has stopped flowing, but the bills keep coming. Your injury and loss might mean you have added expenses, such as medical care, but you lack resources to pay the bills.

How Does Lawsuit or Litigation Funding Work?

While the term "loan" is used, lawsuit funding might not meet the true definition of a loan; rather you receive cash advances, which are non-recourse, to be paid back from the proceeds of your lawsuit or settlement. Contrast this to loan where you're borrowing funds at an agreed interest rate and repayment terms are provided, such as your monthly mortgage or car loan payment.

Non-recourse means you're not responsible for repayment if you lose your case, and the funding company can't go after your other assets or income for repayment.

Receiving lawsuit funding begins with your application and underwriting your claim. The funding company looks at the stage of your lawsuit and merits of your case. Here, the provider is looking at how likely your case is to succeed, and what it's worth. You'll be asked for documents related to your case, ranging from police accident reports, medical records and the complaint for your lawsuit.

If you're approved and receive funding, the terms for your loan or cash advance vary depending on your case. You'll pay fees or interest on the funds you receive; the amount you're charged varies. For example, you'll pay more the earlier you seek funding in your case because there's more risk involved. Funding fees are less if there's already a settlement or judgment in your favor. Make sure you understand how your funding contract works, and what the costs are. Be a smart consumer, and watch out for fees amounting to interest rates that break state usury laws.

Your Lawyer's Limits and Litigation Funding

Know where your lawyer fits into funding your lawsuit, and what limits, liabilities and responsibilities apply. First, you may ask why your lawyer can't provide advance funds related to your lawsuit. Lawyers are bound by professional and ethics rules governing conduct with their clients; providing funding could present several ethical issues such as conflicts of interest, breaching the attorney-client privilege and improper fee sharing.

How would the duties your lawyer owes you be at risk? For example, a lawsuit loan from your lawyer creates a conflict of interest because your lawyer then has a direct financial interest in the outcome of your case. Now there's the risk your lawyer may not make the decisions that are best for you, the client. Fee sharing or splitting can be an issue if the lawyer receives compensation from a funding company. Information exchanges between your lawyer and the funding provider may also risk attorney-client privileges.

Professional rules, and how they are applied, vary by state. A lawyer's interest or involvement with a funding company or helping you secure lawsuit loan products may be okay. Disclosure of information is a must when your lawyer is connected to your lawsuit funding. Don't hesitate to ask about possible ethics issues; your lawyer should welcome your questions.

Be a Patient and Practical Plaintiff

Lawsuits are often stressful, starting with the accident or situation behind your legal case. Often, financial relief can't come quick enough. However, you need to be smart, thorough and patient when considering your options. Make sure you understand any third-party funding for your lawsuit or structured settlement.

Questions for Your Attorney

• Can you refer me to a reputable lawsuit loan company, and can you review my loan contract?
• If I obtain litigation funding early in my case, does the loan company have any say on how the case is resolved? Can it insist I accept a settlement rather than go to trial?
• Would I have to disclose my lawsuit loan to the defendant in my case and is it an issue?