While conventional loans or lines of credit may be available to finance lawsuits, those options are typically only available 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 term "lawsuit loan" is normally used in reference to non-recourse pre-settlement lawsuit funding that is not actually a loan, but is instead characterized as an advance fee, "investment" or form of venture capital.
The advantage of pre-settlement lawsuit financing is that it limits the risk to the plaintiff: the plaintiff has no obligation to repay the lawsuit funding company beyond the plaintiff's own share of any recovery. 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 funding company will lose part or all of its investment.
At the same time, the costs of a this form of funding can be considerable. Pre-settlement advances are structured to avoid usury laws, laws that define the maximum interest rate that can be charged on a loan, and typically carry very high fees, well in excess the maximum amount that could be charged under a conventional loan. These advances are generally best viewed as a last resort for financing litigation.
While a lawyer can advance the costs of litigation, due to concerns about creating a conflict of interest, a lawyer is prohibited from lending 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 that may be inconsistent with the best interest of the client.
However, under appropriate circumstances 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.
If a plaintiff in an injury case does not want to obtain no-recourse lawsuit funding, whether due to the high cost of such funding or for any other reason, the plaintiff may 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 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,
While not advisable, it may actually be cheaper to simply max out credit cards than to obtain a no-recourse "lawsuit loan" from a litigation financing company.
Some people have no choice but to obtain lawsuit financing, even at its high cost. Sometimes an injured plaintiff has no other source of capital, yet 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 lawsuit financing. It makes sense for the plaintiff's attorney to be involved in the process of seeking pre-settlement funding, both in terms of finding a lawsuit funding company which will offer the best possible terms, and to review any proposed contract for funding and repayment. The attorney's cooperation will normally be required in order to close a funding deal and obtain the advance.