Thursday, November 27, 2014

Lawsuit Loans Are a Bad Idea


There is an article in the New York Times today about lawsuit loans. We run into these loans and the lenders who make them a lot because, after all, we are in the business of representing people with personal-injury lawsuits. Whenever possible, we tell our clients to avoid these loans because they are generally a really bad idea. The article does a good job of talking about what is really going on with these personal-injury loan advances and I would like to highlight a few key points.Pay

What are these lawsuit advances?

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An unexpected injury can cause serious financial difficulty in an instant. A personal-injury victim may have medical bills and have to miss time from work. An injury might make work difficult or even impossible during the healing process and the personal-injury victim might not have the savings or an insurance policy to help absorb this burden.

Even if a personal injury victim has a valid lawsuit or insurance claim, the personal injury claim cannot be wrapped up overnight. Insurance companies and defendants don't usually pay anything until it is over and the matter is finished and done. The personal injury claimant is forced to wait for compensation while the claim progresses or while litigation drags on. Waiting for this compensation for actual monetary losses can be devastating to the personal-injury victim and can leave them desperate for any source of funds.

Enter the lawsuit advance loan. They promise to lend the personal-injury victim money now so that bills can be paid and their lives can go on while this lawsuit drags on over time. They tell the personal-injury victim that they don't even have to worry about paying it back; that if the case goes down, they don't owe anything. The personal-injury claimant signs up, gets a check and the clock starts ticking.

Why are these advances a bad idea?

First, the interest rates are somewhere between obscene and disgusting. While many states and the federal government limit the amount of interest you can be charged for a loan, these companies get around those limits by making the loan contingent. That is, you don't have to pay it back if you lose. That sounds like a good deal for the personal-injury claimant, but it isn't. Here's why:

Interest rates represent risk. If a bank deems you a more risky loan applicant than someone else, you will likely have to pay a higher interest rate to make up for that increased risk of default. If a bank quotes you an interest rate that is inappropriately high, you are free to go to a different bank to see if you can get a better rate at the market value. You can be sure that if banks could get away with charging higher interest to applicants with perfect credit they certainly would; the banks would be maximizing revenue and minimizing risk. If there were only a few banks in town and everyone (even those with perfect credit) needed a loan, the bankers would be rich in no time.

Lawsuit advances should be viewed in the same way. The lenders contact the attorney to make sure this loan is a good idea for them. They look at the medical records and speak to the personal injury attorney. They look at the accident report to make sure it wasn't the victim's fault. They have attorneys review the case for likelihood of success. They do their homework. It can be assumed that these lenders are not cutting big checks to people with cases that aren't going anywhere and in that sense, they get to minimize risk far easier than any banker who writes a mortgage ever could.

Adding to this ability to minimize risk is their ability to charge interest rates in far excess of that risk. There are a few lenders around and they all charge extremely high interest. The interest rate tends to be the same regardless of the actual risk involved in this trial. An injury victim might have a settlement in place, a done deal that is waiting on some formalities to close. If that person needed an advance now, they would still be charged the usury interest rates that are in place for all of the personal-injury victims. They will charge as much as they can get away with and the people they are lending to are in a position of weakness and need the money. The term "predatory lending" has never been more appropriate.

Like a virus...

Another big problem is that the loan quickly infects the lawsuit. If the insurance company caught wind of a loan like this, its people would make the case as long and drawn out as possible. The clock is ticking the whole time and it becomes a race on the part of the personal-injury victim to get this thing done no matter the cost. A personal-injury claimant has an incentive to settle cheap early rather than wait for a just verdict because the juice is running and it quickly snowballs. A $10,000 loan can become $20,000 within a year. The next year it could be $40,000 and so on. By the time a case is heard by a jury, it could be several years after the accident. If the matter is appealed, the appeal could drag the process on for another few years. An appeal could result in another appeal or even another trial. The interest would be running the whole time.

It is quite within the realm of possibilities that the presence of one of these loans would lead a reasonable personal-injury plaintiff to either accept a bad settlement offer if it comes early enough or to refuse a good settlement offer if it comes late enough. This poor decision-making would be reasonable under the circumstances and is a direct consequence of a personal-injury loan advance and its unusual nature.

Lawsuits are stressful enough without adding a ticking clock. I would like to see these loans regulated more closely and to see interest rates more in-line with actual default rates. Until then, stay away or at least use them at your own risk.


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