Law Matters: The Pitfalls of Litigation Financing Companies

Getting paid now for a future legal settlement may sound like a great idea, but the ultimate cost might be more than you expected.


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If you have a legal question for Lew and his colleagues, send it to [email protected]. He may answer it in a future column.

This article is for informational and entertainment purposes and not for the purpose of providing legal advice.

I have a good case, but waiting for the recovery is a hardship on me. What can I do?

Most people who have been involved in a lawsuit can tell you, litigation isn’t fast, and it sure isn’t cheap! If you are a party in a complex lawsuit in particular, the case can last months or even years before your dispute is resolved. It can be especially frustrating if you’ve been injured in an accident and are suing to have your medical bills paid, to make up for lost earnings, or to recover for your pain and suffering.

For some, litigation financing companies understandably seem like the perfect solution to the delay, expense, and frustration of litigation. Particularly in personal injury cases, where there is often a high chance of settlement before trial, injured parties will contact a litigation financing company to seek an upfront payment against their expected recovery. For example, someone hit by a car who expects to get a $100,000 recovery two years from now in their lawsuit might contact a litigation financing company for an upfront advance of $10,000 now. In exchange, the financing companies charge interest and usually will only collect from the proceeds of the judgment or settlement.

It may sound like a perfect solution for a frustrated litigant, but be wary: the devil is in the details! As with many things, if an offer seems too good to be true, often it is. Many litigants who seek out these financing companies often overlook the fact that they sometimes charge very, very high interest rates, which are often compounded more often than regular loans. As a result, sometimes if a case drags on, the interest charges will eat up a large portion of the litigant’s settlement, or even the entire recovery! Imagine being injured in an accident and spending months — if not years — in a hotly contested lawsuit only to see an enormous chunk of your recovery be paid over to a financing company.

In recent years, a number of cases challenging these arrangements have been litigated throughout the country, on the basis that they are unconscionable or void as against public policy, or otherwise usurious (charging an illegally high interest rate on a loan). Although the results have varied from jurisdiction to jurisdiction, many states have upheld these arrangements — you received the benefit of your bargain, even if it means that in the end, most of your recovery went to the financing company! Many courts have said, in essence, it’s frustrating, but you agreed to it.

So what can you do? Weigh your options. Often it is best simply not to seek out money from a litigation financing company in the first place. If you have the means to wait, it is often better to do so and not subject your finances to a company with a claim against your proceeds. But sometimes — particularly if you’re severely injured — you need your money now. Lawyers understand that, and that’s where you should make sure to use your lawyer as a resource. Prior to entering into a litigation financing agreement, a lawyer can help advise you about whether you should do so at all, whether you have better alternatives, whether one financing company or another has better terms, and most of all, a lawyer can assist you with negotiating the terms of the financing agreement. One mistake litigants often make is going to the litigation financing company first, before consulting with their own lawyer.

Litigants know that lawsuits are frustrating, often lengthy, and expensive. Many clients would be surprised to learn, however, that their attorneys often share their frustration with the time and expense involved in litigation — we know what you’re going through! If your lawyer can’t help you with the delay in resolving the case and you’re tempted to seek out money from a financing company, speak with your lawyer first. They are often in the best position to advise and protect you.

Lew Tesser gratefully acknowledges the assistance of Tim Nolen, Esq., associate at Tesser, Ryan & Rochman, LLP, in the preparation of this article.

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