Some Truths about Lawsuit Funding that an Attorney Should Know

Any reputed personal injury attorney would always be working in the best interest of his clients. So it is quite natural for you to think twice before you recommend a lawsuit funding firm to your client, whenever your client happens to ask for an advance funding on his pending case. You must be fully aware of lawsuit loan sharks. You are right about being cautious and vigilant. In fact personal injury attorneys must exercise caution simply because the lawsuit funding industry is hardly regulated as it is very much in its conception stages. 

Regulatory Status Quite Weak: Both Clients & Attorneys Need to Be Cautious

In some states there is absolutely no regulatory framework. States like Florida, Nevada, California, New York, Texas and New Jersey are lacking in any sort of oversight for regulating pre-settlement funding. This poor regulatory environment has led to sheer exploitation of litigants by lawsuit financiers. 

As an attorney it is your duty to try and safeguard your clients. There could be several ways to safeguard your clients from being unjustly exploited by any shady lawsuit funding firm. Here are some important facts and truths that every attorney should be aware of, before he co-signs any funding contract with clients.

The Revealing Facts

1)      The lawsuit funding company contacted by your client could very well be a broker in disguise. There is of course no issues with a lawsuit funding broker in general. But there is something quite wrong if the broker is pretending to be a direct funder.
2)      The broker fees would certainly be passed on to the client or the plaintiff. A broker avoids presenting himself as he is because he would be getting 10 to 20 per cent as commission on whatever sum the plaintiff would be getting funded. It is pretty obvious that the lawsuit funder would be transferring the origination fee straight onto your client or the plaintiff.
3)      You must keep in mind that it is quite common for fees to be more than 3.5% per month that would be compounded monthly, till the plaintiff’s case is settled. Suppose your client’s case gets a settlement in 12 months, at 3.5% that is compounded monthly, your client is expected to pay over 70%including fees. In case it takes 24 monthsto reach settlement, your client would be owing around 150% worth of interest.
4)      Several lawsuit funding firms would be charging about $400 as application fees. Many of these funders are not likely to ask for the payment upfront, they would in that case be deducting the application fee directly from purchase price. As such the plaintiff, your client would end up paying interest also, on application fee.
5)      Huge amount of application fees are usually not slashed for smaller advances. Some firms deliberately offer $1,000 advances for $400 worth application fees. It is really shocking to note that even before first day of interest has been accrued, the plaintiff is ending up paying 40%.
6)      If the plaintiff goes to a second funding source for lawsuit funding, there is every likelihood of the initial advance being refinanced at a much higher rate.
7)      Once the second funding firm buys out whatever advance from the initial funder, the second firm would now be owing the entire lien. The rate that they come up with would now be the actual rate that the plaintiff or your client would need to pay till a settlement is reached.
8)      All lawsuit loan firms have different fee structures. Two commonly applied fee structures are a) fixed payout sum every 6 month period or b) compounded monthly interest.
9)      Aggressive lawsuit funding firms have a tendency toward overfunding cases for maximizing profits.Make sure that the lawsuit funding company is not overfunding the plaintiff’s case. Overfunding would ultimately lead to the plaintiff getting almost nothing once settlement is reached. Be strict about insisting that your client sticks to only taking an amount that is necessary to survive through the lawsuit. Ideally, the plaintiff’s advance should never exceed 10%of the most possible conservative value of his case.
10)   Remember that regulatory conditions are ever-changing. It is essential for an attorney to stay updated with the lawsuit funding regulations in his state. You must ensure that all the terms included in the lawsuit funding agreement must definitely abide by the present regulatory guidelines.

Mike Bay is a paralegal and a consultant who has assisted a number of firms and independent clients through courtroom proceedings, or to get requisite funding for litigation by visiting the right lawsuit loan firms through his blog.
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