Why Litigation Loans Are So Dangerous

Why Litigation Loans Are So Dangerous

This June, we had a case settle for $750,000 after four years of a long-drawn-out battle with a Canadian Insurance Company who utilized delay tactics to try and force our client into a settlement out of desperation. Two years into the case it became clear that without being able to work, our client needed a way to survive throughout the end of her settlement. This forced our client to take out a lawsuit settlement advance.

Our client took out a $64,000 advance on her case from a Legal Funding Company that specialized in Pre & Post Settlement Lawsuit Funding. We explained to our client how damaging borrowing money from a funding company can be at the end of the case because they can often times take a significant amount of the client’s net proceeds from a settlement. However, we always leave the ultimate decision to the client. In this case our client felt that there was no other way for her to survive without some form of monetary relief.

Due to the inherent high risk and high stakes environment of a large case, these companies often charge very high interest rates. For example, they charged our client a final bill after two years of $144,000. That is a whopping 225% increase on the borrowed principal in a little over two years. This was not detrimental to our client however because she still received over $200,000 from the settlement of $750,000 after paying her medical bills in full.

It might be surprising that companies are allowed to demand these types of payments. Litigation lenders have jumped on the fact that they are not technically a loan because they do not demand return payment of the principal in the event of a lost case. They will simply eat the cost of the principal and the Plaintiff will not need to pay them back. A loan on the other hand would require that the lender have an opportunity to recoup their funds in the event of a loss. Thus, these companies are not regulated by typical lending laws that cap the number of returns that can be made on a loan.

It is therefore not uncommon for these companies to demand over double the principal after two years as in the example above because these loans are compounded over time. You can therefore think of these companies as part of the Wild West, with little to no oversight on their practices.

We hope that this example helps to show how serious the decision to get financial assistance from a legal funding company can be. We understand that sometimes these loans are necessary as a tool to prevent insurance companies from using low ball and delay tactics to force a client into an unnecessarily low settlement. On the other hand, we strongly encourage our clients to never take financial assistance from these companies unless they believe it is ABSOLUTELY necessary to survive.