What is a Lawsuit Advance?

Tricia Christensen
Tricia Christensen

A lawsuit advance is a cash amount one may receive on the pending amount of a lawsuit. Cash advances are made by a specific company who purchases the rights to that cash if and when the lawsuit settles. In the event that the lawsuit is not successful, the lawsuit advance company cannot collect against the borrower, though occasionally some fees are assessed. This type of transaction is called a non-recourse transaction, as the purchaser (the advancer of the loan) has recourse only to the proceeds of the suit.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

The lawsuit advance industry got its start as organized businesses in the late 1980s. Prior to that, one might informally borrow funds from a friend, a bank, or other interested parties to tide them over until he or she successfully received funds owed as a result of a lawsuit. Today, the lawsuit advance industry is a competitive business. Interest rates depend upon the type of case, the viability of the case, and the marketable rate of companies providing advances.

Reputable lawsuit advance companies will unhesitatingly admit to a potential borrower that rates on a lawsuit advance can be expensive. Often, though, the person seeking funds pending a court decision has no other choice. Without a loan on the portion of the expected award, a person may be unable to meet personal expenses. While the suit is awaiting decision, people may find themselves losing more than whatever they have claimed in the suit. Without funds, mortgages or rent may remain unpaid, cars may be repossessed, or providing the basic necessities like food, electricity and water can be impossible.

With inability to borrow elsewhere, since loans can usually not be made by banks on the potential of possible lawsuit rewards, a lawsuit advance can be the saving grace that keeps a family going as the case winds down. Naturally, the longer the case is held up in court, the more the interest on the loan will accrue. Those who are shortly expecting a settlement, or have received an award amount but must wait several months to receive the award will pay the least amount in interest.

Interest amounts will also vary based on the type of lawsuit. Amounts borrowed may be determined by the likely amount of the settlement. In general, borrowing only what one needs is prudent, as it will mean lower interest payments when the case is settled. There are usually fees attached, but some companies waive fees, but not interest payments, when clients borrow a higher amount of money.

Lawsuit advance companies advertise through brokers, attorneys, television, and Internet sites. Since there are many companies to choose from, it is best to go with a reputable company that is a member of the Better Business Bureau. One should be certain the company is willing to disclose all fees and interest rates upfront. Companies which hesitate to offer full disclosure should be avoided.

Lawsuit advance companies may use lawyers to determine the viability of offering a loan to a potential client. They do not, however, offer any kind of legal advice to borrowers. They have no influence on the outcome of a case, and as well as lawyers who take cases based on contingency payments, they assume the risk of settlements which will not repay the loans they have advanced. They can refuse loans on the basis of cases that may not have much possibility of winning, just as lawyers on contingency can refuse cases.

Though interest rates pending a settlement may be high, they may ultimately make one’s lawsuit more profitable. Both lawyer and client tend to profit by holding out for a larger settlement, than from taking the first or second settlement offers. So even if one acquires a lawsuit advance and has to wait a few more months, thus paying more interest, he or she may ultimately end up with a higher lawsuit award, which will more than pay for interest payments associated with an advance.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent wiseGEEK contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Discussion Comments

anon937516

I almost learned the hard way too, but in the end I went with a company called Pegasus. I found that most of these "funding" companies were really brokers, like the one mentioned. Pegasus Funding is one of the few that give the money to you directly with no middleman, so there are no hidden fees.

anon55821

LawCapital is a scam and a fraudulent company. They will tack on hidden fees and steal the money from the lawsuit and you can't do anything about it. Stay away from this company and just wait until your lawsuit is heard in court.

anon33928

I can tell you from personal experience that at least some of the lawsuit advance companies charge hidden fees. I made a horrible mistake of using a company called LawCapital. They promised me a 2.5% rate and said I would have the money within a few days, well after 2 weeks and tons of phone calls to them I finally received the paperwork. Well the actual rate was 6.99% and they charged me a 15% "origination fee". Since they took so long I had to accept the terms in order to save my house, they promised that they would lower the rate after I signed but of course they would never return my call after they received their money. I now understand that they not only got 15% from me but that they are actually a broker and just a middleman, they also received additional commissions from the actual investor who funded the deal.

I would advise anyone to stay far away from LawCapital...

anon4867

some companies will actually provide you with a quote then you can decide whether you want to accept the terms or not.

anon1928

Looking at lawsuit advance companies, I see 2.99%-3.99% (auto) interest. Is there a hidden finance charge? My attorney said that he will work w/an advance company, but said they may have hidden fees, taking an additional 20% +.

I have 2 lawsuits pending, both auto accident (Oct2005 & Jun2006), both other drivers were dui. The 1st on is set for trial Feb 2008 and will settle prior to trial.

I did talk to my bank and they only loan on property.

I am in need of funds to tied me over, any suggestions?

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