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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Dec 19, 2013

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A lawsuit loan is a personal loan that can help a borrower fund his or her legal case or help him or her pay for living expenses as their lawsuit settles.

Lawsuit loans are generally for victims of a workplace injury or some related grievance where they need to borrow money as they await receiving settlement money.

Unlike most types of personal loans, a lawsuit loan’s repayment depends on whether a borrower wins or loses their lawsuit. If a borrower wins their lawsuit, then they repay the lawsuit loan lender with interest. If a borrower loses, then they do not have to repay the lawsuit loan.

The lawsuit loan industry offers this financing knowing some of their loans might not be repaid. But they do this in order to pass through loophole that allows them to avoid usury laws, which would have to be applied if the financing was required to be paid back in the event of a lawsuit loss.

Unlike when borrowing a personal loan, a lawsuit loan lender won’t typically ask for collateral but instead will examine an applicant’s lawsuit. Those with better chances of winning a settlement are more likely to receive a lawsuit loan than those who are likely to lose their case and, in turn, receive no money.

Examine the following scenario in order to understand a lawsuit loan:

An amusement park visitor injures themselves on a rollercoaster and sues the park for damages. As the lawsuit makes its way through the court system, the visitor is too injured to go to work and is racking up medical bills. He or she borrows a lawsuit loan, allowing them to pay their rent and necessities since he or she cannot work.

Eventually, the amusement park settles with the visitor or is forced by the court to pay money to the visitor. The visitor uses some of the money to pay off the lawsuit loan, which was racking up interest since it was borrowed.

Of course, if the court ruled against the visitor, then the visitor would get nothing but would also not have to repay the lawsuit loan, which the lender just writes off as a loss.

Even though on paper a lawsuit can seem like a risk free way to survive until a settlement, Thomas J. Simeone, an attorney at Simeone and Miller LLP, said that they can actually make settlements more difficult.

“A [lawsuit] loan makes settlement more difficult because the advance must be paid from the settlement funds (along with legal fees and expenses and any medical providers with a lien, Medicare, Medicaid, health insurance, workers comp and a host of other obligations) before the client receives any money,” he said.

The Triple Threat

The risk of no repayment is the reason that lays out how lawsuit loan lenders profit off high interest rates, said Simeone. But in many smaller cases, lawsuit loan lenders also charge processing fees on top of the principal and interest.

If a borrower receives $500 they may get a $250 processing fee added onto it for a balance of $750. Then interest accumulates quickly due to a high interest rate. Of course, if there is no recovery then the lawsuit loan will be unpaid. This risk of no repayment is why lenders charge high interest rates on lawsuit loans.

When added together, the principal, high interest, and processing fee can seriously deplete any sizable settlement that a borrower has won in court.

“At settlement time, an advance must be repaid before any money goes to a client,” said Simeone. “Thus it can impede settlement because a client has little or no interest in agreeing to a settlement if only the loan company will be paid. Moreover, clients know that the loan company cannot come after their personal assets, so they do not mind going to court and losing. That is the equivalent to agreeing to a settlement where they do not receive any money.”

Lawsuit Assignments

In Simeone’s opinion, lawsuit loans are technically not loans, rather they are assignments, which is actually the transfer of an asset from a debtor to a creditor. This has ramifications in bankruptcy, which is designed to alleviate a debtor of his or her debts, namely in the form of owed loans.

Interestingly, if a person files for bankruptcy, the lawsuit loan or lawsuit assignment may not be considered a loan that can be discharged by the court. This is because a lawsuit loan can be considered an asset of the lender and thus outside of the debtor’s assets in bankruptcy proceedings. As a result, even after filing for bankruptcy, a lawsuit loan borrower may still be on the hook for paying up.

“When a client takes a loan, the majority of such loans are actually advances on the case, not personal loans,” said Simeone.