Can I take out a loan for my injury lawsuit?
Sometimes you can. And sometimes you should. There’s nothing wrong with it. Here’s how it works.
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What is litigation or lawsuit financing? Is that the same as no recourse financing?
If you’ve been injured in an accident, you’re probably going through a very difficult period. Maybe you can’t work. You’re probably in pain. You might have bills piling up. You could really use some money. In New York, it’s not legal for your lawyer to lend you money, so they might suggest litigation financing.
Litigation financing companies offer money to people in lawsuits in exchange for a future interest in the settlement. This is colloquially referred to as a “loan,” but it is actually a purchase and sale agreement. The financing company “purchases” a future interest in your lawsuit, and you “sell” them that interest. It’s a cash advance with no collateral. There’s no chance the financing company, (let’s call it a bank) can go after you in the off chance you lose. The bank has no recourse against you. That’s why this type of cash advance is often referred to “no recourse financing.” In other words, if the bank advances you $50,000 to live on while your case is pending, and you go all the way to trial and the jury awards you $0, the bank must eat that loss. They can’t take your house. They can’t garnish your wages. They can’t mess up your credit. They’re stuck and you walk away with the money.
Why would any bank take such a risk? Because the payouts are usually huge. New York has a maximum interest rate of 16%. Any more than that is considered usury. However, because this is not a “loan,” but a “cash advance,” there’s no limit to the amount of interest that can be charged. The difference between a loan and a cash advance is that a cash advance has no collateral. Here, the bank is placing a bet that they will win. Because of the high risk, they can charge whatever interest rate they want.
How do banks decide which cases to take? How do they decide what interest rates to use?
Banks must carefully evaluate which cases to invest in. Every bank in this field hires seasoned personal injury lawyers to review the cases and figure out approximately how much the case will be worth, and when the case might settle. Banks typically invest a maximum of 10% of the case’s projected value. So, if the bank’s underwriter believes that a case will most likely settle for $100,000, the bank will invest at most $10,000 in the case.
The maximum amount of the advance will depend greatly on the case value, which is often tied to the amount of available insurance. If the driver who hit you has only $25,000 of insurance and there’s no other coverage, it will be difficult to get any sort of a cash advance, no matter how injured you are.
The interest rate depends a lot on the chances of the case winning. If the case is shaky, the bank will make the plaintiff pay a higher rate to compensate for this increased risk. If the bank is going to take a risk, they want to get paid a lot of money if they win.
The interest rate also depends on the relationship between your lawyer and the bank. At Haicken Law, we have excellent relationships with several different banks. We insist that our clients not only get the best rates, but that the payoff be capped.
What does it mean for the payoff to be capped?
At Haicken Law, we insist that every payout be capped at 2.5 times the funded amount. If you borrow $10,000, the most you’d have to pay back is $25,000, even if the case drags on for years. We force the banks to put this provision in the contracts because without it, the interest often balloons into an amount that leaves the client with hardly any money when the case settles.
Should I take out money?
It’s ok to take out a cash advance. Just consider that there is a cost to doing so. We have had many clients over the years who take out cash advances and then are frustrated at the end of the case when they get “only” a certain amount. We must remind them that they’ve already gotten thousands of dollars in tax free money throughout the course of the case! (Both the settlement and the cash advance are tax free). Your lawyer and the banker can sit down with you and explain how much you’ll have to pay back if the case settles by certain dates.
The best course of action is to not take out any money. However, this is easier said than done. What if you have been severely injured by someone driving a commercial vehicle with millions of dollars in liability insurance. You have unbearable neck pain that is radiating down your arm into your fingers. The no fault benefits have run out. Your doctor tells you that having spine surgery might alleviate your pain, but you don’t have health insurance to pay for the surgery.
In this instance, it is not a bad idea at all to get a bank to finance your surgery. Not only will it help your pain, but it will also make the value of your case skyrocket. In a case like this, a cash advance on a monthly basis for living expenses is also an excellent idea. This enables you to hold out longer as we get closer and closer to trial. The insurance company will make lowball offers until they see the handwriting on the wall, i.e., that a trial is impending. Insurance companies use sleazy delay tactics to try to keep your case out of court. Our job is to push your case to trial as soon as possible. Once the insurance companies realize a trial is on the horizon, they start reaching for the checkbook. The old saying is “The heat of the courthouse melts the gold.” Before that gold begins to melt, sometimes a cash advance is the best way to go.
For most cases, we counsel clients to try to hold out if possible without taking an advance on their settlements. If clients are desperate, we explain the pros and cons. It is often necessary and advisable to avail yourself of no recourse financing.