I’m sure you’ve heard the term lawsuit loans before and dismissed it as something unsavory, unnecessary, or inaccessible.
I don’t blame you: because of a few faulty advertising campaigns in the early 2000’s, the term “lawsuit loan” conjures images of banks and other lending institutions tricking disenfranchised people into becoming career plaintiffs so they can prey on insurance companies and rich defendants for easy settlement money.
It also paints a picture of lawyers willing to sacrifice their credibility for these settlement hunters, all for a quick and easy fee.
Those who weren’t repulsed by all of this false imagery were caught off guard by the word “loan”. Faced with the idea of periodic repayments of interest and offers of physical collateral, many attorneys brushed off the concept altogether as something too difficult to apply for and too difficult to pay back. Lawsuit loans might as well have not existed, for all the legal community cared.
The Truth Behind The “Lawsuit Loan” Myth
It turns out that the legal community had it right: aside from in a very few rare cases, lawsuit loans don’t exist.
What does exist is a lawsuit, which is one of the most common forms of legal funding. Such advances are actually factoring transactions. The misnomer “lawsuit loans” has confused and misled consumers for nearly two decades now. It’s time to tell the truth about lawsuit advances.
Settlement Advances Are NOT Lawsuit Loans!
Lawsuit advances aren’t loans at all, but are advanced payments of the settlement or legal fee that you already know you will be receiving (advances are available to both plaintiffs and attorneys; award advances are appropriate for plaintiffs, while fee advances are appropriate for attorneys).
While loans traditionally require some sort of physical collateral in order to be approved, lawsuit advances operate differently. They were created specifically to benefit plaintiffs and attorneys, and thus legal funding firms accept a different form of collateral: future legal fees and settlements, also called future receivables. Underwriters at legal funding firms measure the value of these future receivables, along with the likelihood that they will be distributed, in order to determine the size of a lawsuit advance.
Another difference between loans and advances is the way they are distributed. Loans are lent from private banks and then repaid directly to that bank. Advances, as mentioned earlier, are taken directly from an attorney’s or plaintiff’s future receivables. In order to access the capital from those future receivables, funding companies purchase portions of future settlements or fees and provide them to plaintiffs or attorneys prior to distribution.
Once the future receivables are officially distributed, the funding company is paid back directly from the obligor (usually the defendant’s insurance company) or the attorney’s escrow account.
One important point to note about advances is that they do come with a higher repayment value than loans do. There is more risk involved with advances than with loans because advances involve money that has not yet been distributed (and thus there is a possibility that the money will never be distributed); therefore, the costs associated with advances are higher.
However, the advance process, from application to funding to repayment, is specifically friendly to plaintiffs and attorneys. Because the obligor is essentially responsible for repayment rather than the attorney or the plaintiff, personal credit scores generally carry no weight in the application process.
Furthermore, because legal finance firms exist to help plaintiffs and attorneys thrive in an unbalanced market, most advances are significantly less than the perceived value of a client’s future legal receivable to ensure that the client will have funds available after distribution.
Learn More About Legal Funding
Curious to learn more about legal funding and lawsuit advances? Give Thrivest a call today at 888-697-7352. One of our experts will be happy to answer any questions you may have.
For a more detailed explanation of legal funding, please read our detailed publication entitled The Essential Guide to Legal Funding. To keep up to date with the latest developments in the legal finance space, check out our blog.