The Math of Lawsuit Cash Advance - Is it worth it?

When plaintiffs are considering getting a lawsuit cash advance, they shouldn’t let desperation lead them down a path that they’ll later regret. They shoud sit down and weigh their options before making any decisions. Otherwise, their emotions may get the best of them and they may find themselves in a litigation finance nightmare. First things first:

Is it a financially sound way to go?

Well, let’s face it, a lawsuit cash advance loan isn’t the cheapest money available. The rates range from about 1% on structured settlement loans to as high as 5% per month on riskier cases. If a plaintiff has the ability to fall back on a home equity loan, this would be much cheaper money to borrow. And sometimes, even falling back on credit cards could be a safe option. But there are dangers in those options as well. What is the true cost of that “cheaper money”?

With mortgages, home equity lines of credit, credit cards, student loans and most other forms of lending, debt is CREATED. The banks that do these loans create money from thin air by using what is called the factored banking system (see the great cartoon Money as Debt).

The banks only need to have 10% of the money they loan in reserves. So, essentially a bank that is loaning $100,000 for a borrower to purchase a home only has to have $10,000 in reserves. So the 7% the bank charges on that money is really 70% of the money they have in reserves–pretty nice business eh? Well, not really if you consider the hellish situation the banks have gotten themselves into with the housing boom and bust.

But we’re looking at lawsuit loans here. The truth is that with any other form of debt you are entering into what is called a “recourse loan”, which means that you are entering a debt obligation where non-payment leads back to somebody (that means you!). If you don’t pay your mortgage, they take your house. If you don’t pay your car payment, they take your car. If you don’t pay your credit card payments, they make your life a living hell until you do. That’s the way “recourse loans” work, and you will obviously pay less in interest for this reason. But the trade-off for less interest is that the debt is yours, and it could affect you later on if things don’t go as planned.

With a lawsuit loan, you could say that the debt is actually to your lawsuit–repayment depends on the fate of your lawsuit. If your lawsuit is unsuccessful, you don’t pay anything. If your lawsuit is successful, you pay back the loaned amount plus interest. If your lawsuit settlement is less than the loaned amount, you don’t owe anything more than the settlement. That’ the beautiful thing about lawsuit settlement loans.

If a plaintiff were to fall back on a second mortgage or on credit cards, sure it might seem like the right thing to do if you only look at the interest rates involved. But it’s not as cut-and-dry as that.

1. Credit cards can often charge higher interest rates than you could get on a lawsuit cash advance. Many people pay 19%+ on their credit card debt. And if you don’t pay that now, wait until you miss a few payments if things don’t go as planned.
2. With a slow housing market, building up debt on your house may not be the best way to go. What happens when you owe more than it’s worth?
3. What happens if you build up thousands of dollars of debt on credit cards and home loans and you unexpectedly lose your case? This happens all the time. The justice system is unpredictable. That’s why lawsuit cash advance is an option for you.

One of the best ways to decide if a lawsuit cash advance is right for you is to simply look at it mathematically.

When I’m talking to plaintiffs who are considering a lawsuit cash advance, I often tell them about the close friend of mine who inspired me to get into this business. He had a personal injury auto accident lawsuit, and he didn’t know that lawsuit pre-settlement loans were available to him. His case was for about $100,000 and he was receiving physical therapy and chirpractic care under Florida’s Personal Injury Protection (PIP) laws. He was also badly injured so he wasn’t able to work for quite some time and this was putting a lot of stress on him.

Out of nowhere, the defendant’s insurance did the predictable thing: They offered him about $10,000 as an immediate settlement. Of course! This happens every time. This is how insurance companies operate (and where their profit comes from). They especially do this with cases they will likely lose. To them, they have to decide what is the less expensive route to take:

1. Paying attorney fees and eventually losing the case AND paying a huge settlement.
2. Taking advantage of people’s desperate financial situation and their “got-to-have-it-now” mindset by offering them a ridiculously low offer.

Most of the time, the insurance companies pick the latter. And to them it’s fully justified.

Well, because my friend didn’t know of any litigation finance companies and because his lawyer didn’t refer him to any (many lawyers aren’t aware the option exists), my friend ended up accepting $10,000 out of desperation, which he quickly burned through catching up on piled-up bills while he was out of work. This is simply what he HAD TO DO (or so he thought).

If we could go back and change things with the Ghost of Christmas Past (sorry it’s getting close to Christmas and I get a little into it sometimes–especially with my nephew around), then maybe we could see how my friend’s Fate could have been different with a lawsuit cash advance.

If my friend had applied for a lawsuit cash advance on his $100,000 lawsuit, he would have probably gotten about $10,000 (10% of the expected settlement is customary). Note that this would have given him the same financial relief as the ludicrous offer he ended up taking.

How would his situation have been different by the end of the lawsuit?

By the end of the year, he would have gotten the $100,000 settlement. Of course, about $33,000 would have gone to the lawyer in attorney fees, and $13,448.89 would have gone to the litigation finance company (the $10,000 loan plus $3,448.89—3% interest compounded per month for twelve months). By taking the loan instead of the bogus settlement, he would have been able to wait a year for what was due to him and get $63,551.11 after attorney fees and interest (compare that to the $10,000 bogus offer he accepted because he didn’t know his options!). That’s $53,551.11 more!

That, my friends, is the power of litigation finance and lawsuit settlement loans. That’s why I’m in this business, and why I enjoy helping my clients. That’s also why insurance companies don’t like us. But that’s okay, enemies sometimes remind you that you’re doing something worthwhile, right?

 – Jason Argall