How Litigation Lending Affects You
Over the years companies have been created that specialize in lending money at extremely high, even unconscionably high, interest rates to people who are involved in personal injury or wrongful lawsuits and people who are awaiting the payment of money from the settlement of lawsuits. There are also companies who lend money to lawyers who need to borrow in order to fund high-cost litigation and there are companies that exist to buy structured settlements (annuity contracts) from people who have settled their claim in exchange for the payment of money which is to be paid out to them over a period of time.
Each of these business schemes can have a legitimate purpose. On the other hand, all of them can be misused and predatory.
First, the lending of money to people who have a potential claim or who are awaiting a settlement and need money now. It is obvious that a person who is seriously injured may not be able to work and may not be able to pay for needed medical care. Those who find themselves in that predicament are often desperate. A loan in these circumstances may be justifiable, but there are lenders who use the borrower’s desperation to their advantage. If you are in this situation, NEVER agree to a loan without first consulting your lawyer. Many of the companies making these loans charge exorbitant interest. Furthermore, many of these companies demand that your lawyer obligate himself to keep the company informed and to cooperate with them during the litigation and thereafter to protect their loan. Don’t allow dire need force you into a bad decision you will regret.
The second type of loan, loans to lawyers, is a transaction between a lawyer and a lender intended to enable a lawyer to fund the cost of litigation. In some situations, loans of this type are essential. In today’s world of complex litigation the costs can be enormous. This is especially true in class action cases, mass tort cases, and cases that are dependent upon evidence that can be obtained only from multiple expensive expert witnesses and cases that can be expected to go on for years. Many lawyers simply cannot finance these cases out of their own pockets. However, the cost of borrowing the litigation expenses is usually passed on to the client if the case is successful. Consequently, you should ask your lawyer at the very beginning whether he or she will be borrowing money to finance your case and, if so, whether you will be paying the interest on the loan.
Loans for litigation expenses can be misused and abused. I am aware of a well known firm in Houston that created its own loan company that exists solely for the purpose of loaning money to the firm in all of its cases. This is how this scheme works: Every time the firm incurs an expense of any kind in any amount, it is booked as a loan between the firm and the lending company created by the firm. At the end of the case, the firm passes the expenses and the interest on the “loan(s)” to the client. The result to the client is that the firm is being paid interest on all its expenses, even those expenses which most lawyers would consider to be routine firm overhead.
The last type of financial transaction affecting litigation is the most predatory of all. This is the one wherein a company buys structured settlements from people who have already settled their cases. Let’s say that you have a serious injury and you file a lawsuit. The defendant you have sued later offers to settle with you by means of a “structured settlement”. This means that the defendant offers to buy you an annuity contract from an insurance company that will pay you specified amounts over a period of time. Structured settlements can be very advantageous because they have tax advantages and because their internal rate of return is often higher than you can achieve for yourself by investing the settlement money. The drawback is that you can’t get your hands on future payments until they are due. Structured settlements are often used to protect minors and young adults from the consequences of impetuous financial decisions. The next step is that companies such as J.D. Wentworth advertise their willingness to buy your structured settlement for cash paid now. What they don’t tell you is that they will pay you a steeply discounted price that may be pennies on the dollar.
If you agree to the deal, they pay you cash, you sell to them your structured settlement (annuity contract), and they get paid all you would have received had you waited to be paid. I should add here that the difference between what they pay you and what they get is their profit and that it is enough to make them laugh all the way to the bank.
Never agree to sell a structured settlement without getting advice from your own lawyer. Your temporary needs, no matter how urgent and important they may seem, can almost always be met in some way far less drastic than virtually giving away your structured settlement.
Photo Credit: Pete Linforth