It’s quite common that people who’ve been injured can’t work or afford medical treatments. The Affordable Care Act will help them a lot, but even if they have a winning lawsuit claim against whoever injured them, a settlement or judgment might be a long way off. As a result, a large industry of lawsuit loans has sprung up to compensate people in exchange for a portion of the money they get once the lawsuit is resolved. In legal banking jargon it’s a “non-recourse” loan with a lien on the future payout. If the payout is less than the loan’s balance, the lender accepts the loss.
The lawsuit lending industry tends to prefer to serve people who are involved in broad mass-tort cases, but sometimes it works with people with less high-profile claims. Unfortunately, bad results get a lot of press coverage. For instance, early last year, Bloomberg BNA reported on a man who borrowed a large lawsuit loan, settled his case for $150,000, and of the $100,000 he received after his legal expenses were paid, all but $111—you read that right—went to the lawsuit lenders. He unsuccessfully sued his lawyers for professional malpractice for not warning him that the lender would receive most of his winnings.
In general, though, a lawsuit loan is much riskier than taking out another mortgage, a personal loan, or a loan from friends or family. Interest rates can run as high as 15 percent per month. It’s also not unheard of for lawsuit lenders to break state usury laws.
As to how they’re handled in New York bankruptcy, a lawsuit lender has a lien on the debtor-plaintiff’s ultimate recovery, so it will be paid in the bankruptcy when the civil case is resolved. Because it’s an asset, the trustee will take over the personal injury case, and then pay off the lender once it can do so. A variation in the situation would be if the debtor-plaintiff dropped the lawsuit before the bankruptcy. There might be a penalty clause in the loan agreement, but if the debtor is going to file chapter 7 bankruptcy anyway, there won’t be much the lender can do about it.
A bankruptcy court will probably treat a lawsuit loan like a cash advance on a credit card. If the balance is greater than $975 and was taken out 70 days prior to the bankruptcy filing, it presumptively can’t be discharged. Consequently, debtors who dismiss their litigation cases in the 70-day filing window but spend all the money before then will have to file an adversary proceeding against the lawsuit lender to discharge the debt.
Lawsuit loans can help some debtors but might not be worthwhile for others. They should not be taken out lightly.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy lawyer Brooklyn Bruce Weiner for a free initial consultation.