The Lawsuit Loan

What Is a "Lawsuit Loan"?

The term "lawsuit loan" is usually used in reference to a form of pre-settlement lawsuit funding which is not actually a loan, but is instead an advance fee, "investment" or form of venture capital. While actual loans or lines of credit may be available to finance lawsuits, those options are usually reserved to lawyers and law firms. The plaintiff in a personal injury case who seeks to obtain a cash advance against the verdict or settlement in a lawsuit will not ordinarily be offered a loan, but will instead be offered "no recourse lawsuit funding".

The advantage of this form of lawsuit financing is that it carries no risk to the plaintiff - if the lawsuit settles for less than the amount of the cash advance, or if the defendant ultimately prevails and there is no recovery at all, the plaintiff has no obligation to the lawsuit funding company beyond the plaintiff's own share of any recovery. At the same time, the costs of a "lawsuit loan" can be considerable, as they are structured to avoid usury laws, and thus they are generally best viewed as a last resort for financing litigation.

Can My Lawyer Lend Me Money?

Due to concerns about creating a conflict of interest between a lawyer and a client, while a lawyer can advance the costs of litigation, a lawyer cannot lend money to a client. The concern is that if a client owes a lawyer money, the lawyer will have an interest in recovering that money which may be inconsistent with the best interest of the client. However, a lawyer may be able to refer a client to a lender who can offer a loan to help the client pay expenses during the pendency of a lawsuit, or to a reputable lawsuit financing company.

Sources of Lawsuit Financing

If a plaintiff in an injury case does not wish to obtain no-recourse lawsuit funding, due to the high cost of such funding, the plaintiff may wish to consider other forms of loans. For example, if the plaintiff has home equity, it may make sense to obtain a mortgage or home equity loan to deal with certain expenses which arise prior to the settlement of a lawsuit. It may be possible for a plaintiff to obtain a personal loan or line of credit. It may be possible to borrow funds from friends or family. In some cases, it may be cheaper to simply max out credit cards than to obtain a no-recourse "lawsuit loan" from a litigation financing company.

Is a Lawsuit Loan Right For You?

Some clients have no choice but to obtain lawsuit financing, even at a high cost. Sometimes there is no other source of capital, and the client must have funds to pay medical bills, obtain health care, to pay the rent or mortgage, or even to buy food. When a personal injury plaintiff is in dire financial straits, it may be appropriate to obtain a "lawsuit loan". However, it is a good idea to involve your attorney in this process, both in terms of finding a lawsuit funding company which will offer the best possible terms, and in having your contract with that company reviewed before you sign it.

Copyright © 2004 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Nov 8, 2014.