The rates for lawsuit advances are generally negotiated on a case-by-case basis. There is no fixed formula under which rates are established. Unlike conventional loan products, lawsuit advances are not loans but rather non-recourse forms of financing, so they are generally not regulated by the statute or subject to usury laws. Implicit in any rate is a host of risk and economic factors that ultimately determine the cost of each advance:
liquidity—the ability to sell a given asset, for cash, on short notice. Often, bank and insurance regulators limit the ability of regulated depository and lending institutions and insurers Who. The main two categories of lawsuit advance recipients are plaintiff-attorneys and the plaintiffs themselves. The largest type of lawsuit advance is the personal injury case.
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What. Generally, a funding company provides a non-recourse type of financing, an investment conditioned on the successful resolution and due upon collection of that claim. In the event of loss, the plaintiff is not obligated to repay the funding company. Similarly, in the event the claim is resolved for a much smaller amount than anticipated, those proceeds operate as a ceiling on any return due to the lawsuit investor.
When. “Most advances are made at the pre-trial stage”. Unlike other non-recourse forms of financing (i.e. Commercial Real Estate), there is no tangible collateral at the time the financing is offered. There is only an expectation of a recovery, which may or may not materialize. Post-judgment advances are arguably less risky because the judgment is tangible collateral, although the value of such collateral varies greatly. For example, post-judgment claims are readily assignable under the long-established common law and are covered by the Uniform Commercial Code.
Risk. This type of investment is usually expensive due to the risk of losing the funding company assumes. For instance, a potential investor must assess both the size of potential recovery and the apportionment of liability (eg. contributory vs. comparative). Another critical component includes the plaintiff’s prospects of collecting on a judgment. Medical or other liens against the judgment are also an important component of the risk assessment that an investor must consider. For example, statutory liens (IRS, child support, etc) will often reduce the funding company’s return because they have priority when it comes to payment. Unfortunately, no central registry exists for liens and funding companies are unable to fully discover them prior to making an investment. For this reason, lawsuit investors must factor this type of uncertainty into any rate that is passed on to consumers.
Many other factors affect the viability of the investment, thereby increasing the cost of this product. Most lawsuit advances are very small. The average lawsuit advance is less than $5,000 and processing each transaction is relatively costly. A funding company must hire attorneys to evaluate cases, purchase expensive office technology and hire staff to keep track of their investments. A large investment costs the same to serve as a small investment, but they are few and far between. Contrast the size of a typical lawsuit advance to a mortgage loan and it becomes clear that doing many small deals is expensive. It is also a niche market that does not lend itself to effective retail advertising. Only 2% of the population has a lawsuit and finding them is an expensive proposition. All of these factors contribute to a relatively high rate of return for the typical lawsuit advance.
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Economics. Lawsuit advances also differ from more conventional financing products in that they must take into account the lack of liquidity inherent in their investments. The average duration of a personal injury case is approximately 18 months for auto cases and much longer for other types of claims. Generally, investors value to invest in or hold “illiquid” investments, which limits the market for illiquid investments. In other words, rates necessarily rise as a function of illiquidity risk.
“FRA Financial Group Founder Joe RoosEvans is an industry veteran who has built one of the nations’ most successful Independent Marketing Organizations – Financial Resources of America and its affiliated companies, including FRA Financial Group.”
Tags: Lawsuit Advances, Lawsuit Funding, Lawsuit Loans, Legal Advances