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The procedures for obtaining law suit loans from lending companies

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For those who have limited assets, or have already exhausted them, one option is getting a lawsuit loan. The name is actually a misnomer, as the transaction is really pre-settlement lawsuit funding, or an advance on the eventual settlement.

Lawyers are not eager to lend money to their clients, as it creates a conflict of interest. A lawyer who has a client in debt to him has a vested interest in obtaining a judgment or settlement in a way that may not benefit the client. However, lawyers can, and do, refer their clients to so-called lawsuit loan companies that will advance anywhere from $500 to $100,000 to people engaged in a lawsuit. For those rare high-stakes cases, advances can go as high as $1 million. Many of the companies also offer cash advances against existing structured settlements.

As the number of lawsuits increases, so does the number of lending companies. An Internet search for the term "lawsuit lending" brings up more than 4 million hits. According to David Solomon, Managing Partner of LawCapital Enterprises, a lawsuit-lending company, the industry got its start in the 1980s. "There was a company that started marketing to people in 1988-1989," Solomon says. "Recently is when it has started really mushrooming. In the last three or four years, it has really taken off. Now you're seeing hedge funds and big investors getting involved."

Solomon says that "big time" investors like investing in lawsuit loans not only because of the excellent returns, but also because "a lot of people understand lawsuits. Lawsuits have been around for ages. It's a different way to make money."

The boom in lending companies has been good for the consumers. "In the beginning, everyone charged 15% per month; but with the competition, it has come down," Solomon notes. "Our rate can be 2.5 percent up to 4.99 percent. Cases that are more likely to settle get a lower rate. Cases that are inherently riskier, like the slip and fall or medical malpractice ones—more of those go to trial, and more of those are lost, so they have higher fees."

The application process is usually simple, and an answer is usually given in one to two days. A person submits the amount of money he/she needs, the basic details of the case, and the name and contact information for his/her attorney. The lending company contacts the attorney about the case and then makes a determination as to the likelihood that the applicant will prevail in the case and a calculation as to how much they may win. A decision to lend money is based almost exclusively on these criteria. Good credit and employment are not requirements for approval. If the applicant prevails, he/she must pay back the principal, with high interest, from the settlement or judgment. If he/she loses the case, he/she does not owe the lending company anything.

The most common kinds of cases lawsuit-lending companies see are vehicular accidents, slip and fall, medical malpractice, and workers' compensation. Individual state laws may prohibit companies from advancing money in certain types of cases, particularly workers' compensation claims.

The amount given to the applicant depends on what the lending company thinks the plaintiff's claim is worth. "We don't lend more than 10% of what the case is worth," Solomon says. "By not over-advancing the client, we don't run into trouble."

At first blush, it sounds like a win-win deal; but lawsuit loan companies charge high fees for the risks they take. Some firms charge a flat fee, and others charge monthly interest on the principle. Given that lawsuits can drag on for years and years, a successful plaintiff can find his/her entire judgment going to the loan company.

According to Solomon, the average advance period is "about eight to ten months." He goes on to say that most clients try to borrow as little as possible, only "enough to pay the mortgage or some medical bills."

To avoid usury laws, lawsuit-lending companies will not refer to the funds as a loan, but rather as an advance or an investment. Because the contract does not stipulate the return of a certain amount of money, but rather a certain portion of a future settlement, the transaction is not legally considered a loan.

There are many ethical and legal concerns raised by lawsuit lending. Some lawyers are reluctant to participate in helping a client get such a loan, feeling that it may entice the party into dragging out the case to delay repayment or to quickly accept an inadequate settlement to avoid paying more high-interest fees. The state of Florida prevents attorneys from participating in lawsuit-lending interviews, thereby greatly reducing the likelihood of a company's extending funds to the applicant. A Michigan court recently ruled that a plaintiff did not have to pay the interest fees on his loan because the defendant's liability had already been established. Because the loan company did not have a risk, the contract was dubbed a loan and thus was illegal under the state's usury laws.

"Attorneys are usually skeptical," Solomon says. "When we speak to clients, we tell them, 'Your attorney will advise you against it. You can ask them for a loan, and they'll probably tell you no.'"

Solomon says his company is up front with their clients about the cons of accepting an advance. "We're always up front with the client that this is expensive money. If they can still get money from a bank or a credit card, or borrow from family or friends, they should do that first."

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