The Lawsuit Loan

Many injured plaintiffs run short on cash while their lawsuits are pending, and may be enticed by the idea of getting a lawsuit loan to help cover their expenses while they wait for their case to settle or to reach trial. Before entering into any sort of lawsuit loan or financing agreement, it is important that the plaintiff understand the nature of the funding and terms of repayment.

What Is a Lawsuit Loan

A plaintiff in a personal injury case who wants to obtain a cash advance against an eventual verdict or settlement in a lawsuit will not ordinarily be offered a loan, but will instead be offered no recourse lawsuit funding. Although actual loans or lines of credit may be available to finance lawsuits, those options are usually reserved to lawyers and law firms.

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.

The advantage of non-recourse 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 non-recourse funding can be considerable. The financing is structured to avoid usury laws that would otherwise limit the investment company's profits if it were to issue a standard loan. Also, investment companies are very cautious and are unlikely to finance a lawsuit that won't result in a settlement that is sufficient to cover their fees. Non-recourse funding is normally best viewed as a last resort for financing litigation.

Can Your Lawyer Lend You 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 money to their lawyer, the lawyer will have an interest in recovering that money that may be inconsistent with the best interest of the client.

Even though a lawyer is unable to provide a loan to a client, 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.

Other 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 that 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 the process of seeking financing. Your attorney may be able to suggest more affordable alternatives. If not, your attorney may be able to help you find a lawsuit funding company that will offer the best possible terms, and can review your contract with that company before you sign it, in order to protect your interests.

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 Dec 14, 2016.