Some legislatures are hoping to limit lawsuits by limiting lawsuit lending. Image: Flickr / trumanlo / CC-BY-SA
Lawsuit lending is a relatively new industry in the United States. Investment brokers and banks offer plaintiffs loans to live on and fund a lawsuit while it is in court. Some states are legislating these short term loans out of existence, others argue that it is a needed service.
The expense of bringing a lawsuit
Becoming the plaintiff in a lawsuit can be an expensive undertaking. While large payouts can be awarded, it often takes years and thousands of dollars just to bring a case to court. Though the average payout of a personal injury lawsuit is in the range of $285,000, many plaintiffs simply do not have the money to bring or continue a lawsuit. In order to finance these lawsuits, more and more people are turning to lawsuit loans.
The emerging lawsuit loan market
Banks, investment firms and other investors are starting to take on the cost and risk of personal lawsuits. These bad credit loans, not payday loans, are categorized as “loans” in some states, “investments” in others. The investors/lenders often require between 150 percent and 300 percent of the investment amount, but only if the plaintiff is awarded damages at the end of the case. If the plaintiff loses the case, the investors do not collect any cash. Some states are attempting to put annual percentage rate caps on these loans. Others are passing consumer-protection legislation that caps the involvement lawsuit loan lenders can have in the case. Maryland is considering a bill that would limit the lenders to collecting no more than 200 percent of the total loan amount.
Arguments for and against lawsuit loans
Personal injury lawsuits and tort cases are often the focus of discussions on cost-cutting. Rising costs of malpractice insurance and business insurance are often blamed on the number of personal injury lawsuits. Proponents say that lawsuit loans provide a needed service that opens up the legal system to individuals who do not otherwise have the resources to pursue lawsuits. Opponents claim that these loans are usurious, and by providing resources for even more lawsuits to be filed, these lenders are abusing the legal system for profit.
How lawsuit loans affect your wallet
If you have never been involved in a lawsuit, lawsuit loans may not sound like a big deal. This financial product, however, does affect many people. Personal injury or tort lawsuits have an effect on the cost of products, services and insurance that everyone must pay. In states that do not have payout caps, these lawsuit loans could further increase the cost. Alternatively, these lawsuit loans are also a balancing force, allowing those without extensive financial means to access the legal system to have their grievances heard.
Sources
Star Advertiser
MedicalMalpractice.com
