Lawsuit Lending

Lawsuit lending is a financial practice that provides “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. These loans are typically attached to sky-high interest rates, fees, and charges – as much as 200 percent – that can leave borrowers with little to no recovery. In addition, lawsuit lending prolongs litigation and distorts the fundamental nature of the civil justice system.

In lawsuit lending, repayment is contingent on the plaintiff recovering some sort of monetary compensation, either through a settlement or verdict. In fact, the lawsuit lending industry goes to great lengths to tell the public that consumer lawsuit loans are not really loans at all, but are instead “nonrecourse financing.” This rationale is how lawsuit lenders have managed to avoid regulation in many states. read more...

Unfortunately, lawsuit lending is far from harmless. It hurts consumers while undermining the integrity of the justice system.

The practice hurts consumers by eating into their recoveries in litigation. The New York Law Journal reported on the case of a Brooklyn man who borrowed $27,000 from a lawsuit lender for a slip-and-fall lawsuit. His case was settled five years later, but the lender demanded $100,000 – two-thirds of the total settlement and more than three times the amount of the original loan. To add insult to injury, the plaintiff’s lawyers pocketed an additional one-third of the settlement – leaving the plaintiff with just $111 out of a $150,000 settlement. In another case reported by the New York Times, a plaintiff actually lost money. After winning nearly $170,000 at trial, the plaintiff’s lender claimed it was owed $221,000 – an amount 30 percent larger than the total recovery.

Moreover, lawsuit lending distorts the civil justice process by altering a plaintiff’s decision making process. For example, a plaintiff may reject a reasonable settlement offer for the chance of obtaining a higher verdict in court because they will need to pay off a high-interest loan. This choice jeopardizes the chance of any recovery, as litigation could result in a lower than expected verdict or a judgment in favor of the defendant. It also increases costs for defendants, who are forced to endure prolonged and costlier litigation.

Finally, lawsuit lending undermines the integrity of the civil justice system. By inserting a third party into the case, lawsuit lending compromises the interests of litigants – upsetting a primary bedrock of the justice system. It also creates conflicts of interests for plaintiffs’ lawyers, who may develop referral relationships with certain lawsuit lenders and be expected to “steer” clients to those lenders.

Reforms

Lawsuit lending should be regulated like any other consumer financial product. In November 2015, the Colorado State Supreme Court unanimously decided that lawsuit lending is subject to the state's existing consumer lending law. The ruling established an important legal precedent that lawsuit lenders must play by the same rules as other lenders in the state. Several bills have also been introduced in state legislatures to do exactly that. Oklahoma became the first state to pass such legislation in 2013. In 2014 Tennessee passed a law that provides meaningful regulation to lawsuit lending, and in 2015, Arkansas followed suit. Indiana joined the community of states regulating this product under state consumer lending laws in 2016. 

Research

West Virginia's Climb: Lawsuit Climate Progress in the Mountain State and the Path Ahead

January 10, 2018 | West Virginia has begun shedding its reputation for having one of the worst civil justice systems in the nation. The state's lawsuit climate ranked dead last or second to last in surveys of business executives and attorneys conducted eleven times over the past fifteen years--until 2017. This report explores the beginning of the state's encouraging transformation and highlights areas where it may continue this progress.

101 Ways to Improve State Legal Systems: A User's Guide to Promoting Fair and Effective Civil Justice - FIFTH EDITION 2017

September 12, 2017 | A user's guide to state legal reforms, providing policymakers with a compendium of options available to foster a sound legal system and promote state economies. This resource also offers a compilation of recently-enacted legal reforms to show how legislators can move the proposals described in the guide from theory into practice.

All Results for Lawsuit Lending

In the News Today - February 10, 2016

February 10, 2016 | News and Blog

Lawsuit Lending Regulation Bills Moving in Indiana: "Two bills once again are moving through the Statehouse that would regulate third-party financing of lawsuits. While such measures died in previous sessions, the current bills are getting a better reception because the consumer legal funding industry is learning what can happen when it does not compromise." (The Indiana Lawyer) Read More »

POLL: Missouri Voters Overwhelmingly Support Common Sense Lawsuit Reforms

February 01, 2016 | News and Blog

"Show me the legal reform." That appears to be the sentiment among the vast majority of Missouri voters, according to a recent poll. Read More »

101 Ways to Improve State Legal Systems: A User's Guide to Promoting Fair and Effective Civil Justice

Author: Victor E. Schwartz and Cary Silverman, Shook, Hardy & Bacon L.L.P. | September 10, 2015 | Research

101 Ways to Improve State Legal Systems offers some of the many options available to foster a sound legal system. It considers fair and effective measures to improve the litigation process, promote rational liability rules, and rein in excessive awards. Read More »

Latest Development in Ecuador Case Shows Problem of Litigation Financing

May 08, 2015 | News and Blog

This week, a second litigation funder repudiated its role in the fraudulently-obtained $18 billion verdict against Chevron in Ecuador. As discussed in our blog post, the funders' participation in this case lays waste to their claims that funders will only pursue meritorious cases. Read More »

In the News Today - April 17, 2015

April 17, 2015 | News and Blog

Preet Bharara, the United States attorney for the Southern District of New York, has faced a deluge of criticism from the federal judiciary of late for his borderline tactics, most recently from Judge Valerie Caproni in Manhattan who condemned Bharara for orchestrating a "media blitz" in the days following Sheldon Silver's indictment on corruption charges. (New York Times) Read More »

Consumers Beware: Lawsuit Lenders Go Digital

April 16, 2015 | News and Blog

The "ugly" side of the Internet is in the eye of the beholder - but we tend to think the appearance of new sites that help fuel the growth of the lawsuit lending industry fall into that category. Read More »

Why Lawsuit Lending Left Unchecked Is a Threat to Free Enterprise

March 31, 2015 | News and Blog

As an affiliate of the U.S. Chamber of Commerce, the U.S. Chamber Institute for Legal Reform (ILR) knows a thing or two about free enterprise. Read More »

Crain's NY Highlights ILR's Efforts to Rein in Lawsuit Lenders

February 11, 2015 | News and Blog

"Is this a course we want to take in the U.S. for our civil justice system? Do we want it to become a profit-making entity for private hedge funds?" Read More »

Kudos to Indiana House for Passing Lawsuit Lending Reform Bill

February 06, 2015 | News and Blog

Earlier this week, Indiana became the latest state to advance legislation to rein in the lawsuit lending industry, with the Indiana House of Representatives passing a common-sense reform bill on a vote of 68-20. Read More »

ILR Launches Mobile Apps to Highlight the "Faces of Lawsuit Abuse"

January 06, 2015 | News and Blog

ILR has launched mobile apps for its successful "Faces of Lawsuit Abuse" campaign - providing a unique engagement experience for users accessing the Web from their smartphones and tablets. Read More »

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