You might not have heard of the terms “plaintiff funding,” “lawsuit loan” and/or “legal funding” until you were well into litigation and struggling to make ends meet before your settlement arrives. If you’re out of work following a catastrophic accident, that settlement will be a welcome relief. Until then, however, bills still have to get paid, rent or mortgage must be met, and food has to be put on the table.
Historically, the for-profit plaintiff-funding industry has taken advantage of the individuals in this exact situation. At the Bairs Foundation, we believe that funding litigants and their families is a necessary part of Americans’ access to justice.
We have paged through countless FAQ pages created by the unregulated, for-profit non-recourse lending industry. We’ve started a series of our own answers, which we hope will do two things: show how our non-profit organization, the Bairs Foundation, is changing the model of non-recourse advances, and make sure the public is properly educated and empowered when it comes to pre-settlement funding.
If you have a question we have not yet addressed, feel free to post it in the comments. This post is the second in a series of blog posts about legal funding for plaintiffs.
Is legal funding a loan?
According to the American Legal Finance Association (ALFA), legal funding is different from a loan. ALFA refers to it as a non-recourse transaction with no guarantee of repayment. That’s because a person who receives a non-recourse advance is not personally obligated to put up collateral and pay back the company with assets if he or she loses the lawsuit. In those situations, the non-recourse company loses its money because it agreed in advance to only recover against the lawsuit.
Because the companies argue that they’re taking a risk by providing non-recourse advances, some charge staggering interest rates that can end up costing a plaintiff over 100% of the amount they originally borrowed.
At the Bairs Foundation, we offer advances at seven percent simple interest. Simple interest is calculated as a percentage of the principal.
Are people safeguarded from the practices of the non-recourse industry?
The non-recourse industry is not regulated. Although the New York Attorney General and others have probed this section of the litigation finance industry, unfortunately, little has been done to protect consumers. The national debate continues on whether these agreements should be capped by our legislatures, as many politicians and government entities are aware of their usury nature.
How can non-recourse companies tack on so much interest to their advances?
Interest refers to the money a borrower regularly pays back to the company who advanced them the money. There are multiple ways of calculating interest, and each affects the total amount of money owed by a borrower. Simple interest, for example, is calculated as a percentage of the principal amount of capital. On the other hand, compound interest is calculated on the principal amount and the accumulated interest of previous periods. So over time, the base amount that is being used to calculate interest grows and grows, like a snowball, and the accumulating interest grows and grows as well.
Many companies charge compound interest, because it accrues at a greater amount. Unfortunately for the plaintiffs, the total amount of interest paid on an advance can end up being more than the original amount a person borrowed.
It is usually in the best interest of the borrower to find a simple interest arrangement, because the total amount owed tends to be substantially lower. That’s why the Bairs Foundation provides advances at seven percent simple interest.
MORE QUESTIONS? ASK BAIRS FOUNDATION FOUNDER JOHN BAIR
John Bair has guided thousands of plaintiffs through the settlement process. Motivated by a desire to assist others in protecting their financial well-being, John and his wife Amy established the Bairs Foundation. At seven percent simple interest, the organization provides the financial assistance families need during litigation. Read more at http://www.bairsfoundation.org/.
A West Point graduate where he served as captain and military aviator, John Bair continues his commitment to our country through his efforts within the settlement planning industry. He has represented families of victims lost in the Flight 3407 crash, offered pro bono services to the families of 9/11 victims and drafted the first consumer protection bill for plaintiffs (H.R. 3699).