If you have been injured in an accident it is quite likely that you have been financially stressed as a result, and are in need of an advance against your insurance claim, lawsuit or other legal action. If you are looking for someone to lend you money based on your future settlement, BEWARE! There are reputable sources available but, unfortunately, there are many more disreputable ones as well. In this article we will explain what to look for in a funding company and how to avoid being burned.
First of all lawsuit loans are not really loans – they are non-recourse investments and are not subject to usury laws. To avoid usury limits, which would render product economically infeasible, typical lawsuit loan or lawsuit funding transaction is done in form of an investment rather than a loan. This means that funding company only gets paid if lawsuit or claim is successfully resolved. If you lose your case you own them nothing! Generally speaking, this non-recourse element renders transaction an investment (not a loan) under law.
In past, there were no sources of help available to personal injury victims due to a strange confluence of circumstances. 1.Bar Association rules of ethics prohibit your attorney from lending you money for anything but case expenses, experts, tests, travel to doctor etc. This rule exists for your benefit. The Bar is rightly concerned that if your lawyer lent you money against your future settlement, a conflict of interest might arise, and you could be pressed into accepting a settlement that was less than you otherwise would accept. Also, attorneys are not banks and they simply can’t afford to operate their law practice and be a lending institution as well. 2.Banks and traditional lending institutions do not have skills to evaluate personal injury lawsuits and thus, will not lend money to someone whose primary asset is their lawsuit. About seven years ago, this void in financial system started to be filled by a number of entrepreneurial companies – some good, some bad. It was a rather strange group consisting largely of lawyers, wall streeters, and well-heeled business people. They used their own capital to fund cases and a new industry was born.
In these early years fees were very high and contracts very severe. While rates generally ranged from 3% to 6% per month, it was not uncommon to see contracts with rates of 15% per month, compounded! Contracts were also very Byzantine. However, rates have steadily come down and contracts, while not exactly consumer friendly yet, have become less severe. In short, business was maturing into a responsible part of specialty finance industry.
However, over past two years or so, American Cash Flow Corporation, a “marketing” company with a rather checkered history, targeted industry for promotion. Since then, lawsuit funding industry has resembled a Wild West gold rush attracting an unbelievable number of “get-rich-quick” rip-off artists, amateur lending brokers with no experience and just plain folks who paid their $5,995 ($2,495 for tape course) to become a “cash flow broker” and are trying to make their fortune.
Virtually all of these “cash flow brokers” are just that – brokers. They do not invest their own money to fund lawsuit advances. However, they all do have websites that trumpet their expertise without revealing that they have none and are not acting as principal. If you are not careful dealing with them can make your situation worse – much worse.
Tips for shopping for a lawsuit funding: •Deal with a company that is investing for its own portfolio. Otherwise, you could wind up paying a great deal more than necessary. Do not deal with brokers - someone has to pay brokers fee and that someone is you! Would there be so many brokers if their commissions were not high? •Deal only with certified websites. When applying online, deal with a website that has seal of Trust-e or one of other recognized non-profit website privacy confirmation organizations. Your personal information may be used improperly. •Do not supply information that is not otherwise discoverable. Certain information is privileged (between you and your attorney) but that privilege is lost once it is shared with a third party. An inexperienced funding company may require information about your case that, once in their possession, will lose its attorney-client privilege and may be subpoenaed by defendant. Experienced companies like CapTran www.captran.com never ask for this type of information. •Look for best rate. Some companies like CapTran offer best rate guarantee. If CapTran approves a case and makes an offer, they will match or beat any legitimate competitor’s written offer or pay you $200. (You only get $200 if they fund case or you turn their offer down for some other reason.) •Do not make multiple applications with different funding companies. First of all, you have no way of knowing if that company is going to try to sell your deal to one of others to which you have applied (which will not sit very well with real funding source). Multiple applications create a nuisance for your attorney since he or she will have to complete many requests for information. Your best bet is to make an informed choice and work with that company. •Check with your attorney. Never sign a complicated contract such as a lawsuit funding agreement without first consulting with your attorney. Questions to ask a funding company: 1.How long have you been in business? The lawsuit funding industry is very young and has a great number of brokers and inexperienced companies with no real money. A sure tip-off is if company advertises a mind-boggling array of financial products and services including note purchasing, account receivable financing, structured settlements, purchasing of lottery winnings etc. They simply want to shop your funding application until they find someone with money to fund it. Meanwhile, nothing is really happening with your application. If a company advertises that they work with a “network of investors” it simply means that they have no real funds of their own and therefore, cannot make a funding decision themselves.