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Facts Every Attorney Must Know About Legal Funding

by Olufisayo
Legal Funding

It is expected that every personal injury attorney will have the best interest of their clients at heart. Therefore, whenever a client is interested in getting an advance on their case, which will be recovered once a settlement is made, the attorney should find it easy to refer them to a legal funding company that will help them get the funds their need to sort out their current financial situation.

Of course, there are a lot of vile about lawsuit funding companies, and this is primarily due to their predatory tendencies and the high rates they usually have. It should be noted that the industry is still at its infancy stages, and there is still a lot to be done, regarding regulations and policies so that both clients and attorneys may use them without having a lot of worries.

Nonetheless, if you are an attorney, especially one specializing in personal injury, here are a few facts you should know about legal funding and the industry in general-:

 Legal Funding

The regulatory conditions on legal funding are constantly changing

Being a relatively new field, the regulatory conditions of lawsuit funding are still very fluid and keeps on changing from time to time. As a practicing attorney, it is imperative to keep up with such changes so that every time you sign off a funding agreement, it is in tandem with the current guidelines. This is not just to help you become better at your work, but also to shield you and the client from future potential legal loopholes that may prove to be very costly.

Funding companies have different fee structures

Though there are two most popular funding fee structures, they will always vary from one company to another. The common structures adopted by most companies a compounded monthly interest or a fixed payout amount made once every six months. Depending on how you look at them and your personal preferences, they can either be fair or excessive. Always check on the percentage rate of each so that you can advise your client accordingly and help them save some money.

Some companies will omit their payoff table from the agreement

It is imperative that as the attorney, you help your client understand precisely how much they will be owing after 6, 12, 18 and 24 months following the signing of the agreement. A professional lawsuit funding company will be obligated to include a clear payoff schedule on the agreement, but the less professional ones may omit this table to avoid scaring the client. In such a case, it is the duty of the attorney to ensure that their clients are well informed.

Some companies may overfund cases to maximize their profits

Other than their predatory tendencies, there a good number of companies who will intentionally give more than necessary funds so that they can make good profits in the ultimate. It is sad to observe that most clients will always think of this as a gesture of generosity on the part of the lender, but this is because they don’t understand the catch in it. As the attorney, you should never allow the company to overfund the case.

This is simply because when the case is finally settled, your client may receive near nothing in the settlement. Ideally, you should advise your client to take only what they think will enable them to get through with the lawsuit and nothing extra. The recommended figure should not be more than 15% of the most conservative value of the case.

The application fees are north of $400 for most companies

Since most of the funding companies don’t expect to be paid upfront, they will deduct the application fee from the total loan advanced. With such an arrangement, your client will be paying interest even on the application fees and which most companies in the US and Canada have pegged anywhere north of $400.

Small advances don’t attract low application fees

You have to be very cautious about the application fees when dealing with lawsuit funding companies. It is disgusting to note that the fees are always very high, and this is irrespective of the amount you are applying for. For example, you may get an advance of $1000 and pay an application fee of $400 – that’s a cool 40% of the amount applied. And this is not to mention that not even a single day of interest has been considered – interest rates are also usually on top of the roof.

The second funder will buy out the first agreement

If your client got funding from Company One then makes another application a few months down the line to Company Two, Company Two will almost always buy the remaining interest belonging to Company One. In the industry lingo, this is referred to as “paying off” the first funder.

There are chances of refinancing with a higher rate in cases where a second funder is involved

In the event of a pay off by a second company, the second company will now become the sole owner of the entire lien. As such, they may assign a rate of their own choosing, which may be higher or lower than what the first company offered. You should advise your client that this will now be the rate they will be expected to pay until the case is finally settled.

It is common for fees to be above 3.5%/month and compounded monthly until settlement

This is one of the reasons why lawsuit loans are considered to be very expensive. With an interest rate of 3.5% per month, which is again compounded monthly, if it takes up to 12 months to settle, then the payment on interest can be over 70% of the borrowed sum, including the fees. If the case is settled after two years from the time the agreement was signed, the interest may be well over 150%.

Knowing the above and passing them over to your client should help them make an informed decision when they are seriously considering these types of loans. Unless it is absolutely necessary and there are no other sources of funding, such loans should always be avoided by the client.

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