If you have been injured in an accident it is quite likely that you have been financially stressed as a result, and are in need of an advance against your insurance claim, lawsuit or other legal action. If you are looking for someone to lend you money based on your future settlement, BEWARE! There are reputable sources available but, unfortunately, there are many more disreputable ones as well. In this article we will explain what to look for in a funding company and how to avoid being burned.
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First of all lawsuit loans are not really loans - they are non-recourse investments and are not subject to usury laws. To avoid the usury limits, which would render the product economically infeasible, the typical lawsuit loan or lawsuit funding transaction is done in the form of an investment rather than a loan. This means that the funding company only gets paid if the lawsuit or claim is successfully resolved. If you lose your case you own them nothing! Generally speaking, this non-recourse element renders the transaction an investment (not a loan) under the law[1].
In the past, there were no sources of help available to personal injury victims due to a strange confluence of circumstances.
1. Bar Association rules of ethics prohibit your attorney from lending you money for anything but case expenses, experts, tests, travel to the doctor etc. This rule exists for your benefit. The Bar is rightly concerned that if your lawyer lent you money against your future settlement, a conflict of interest might arise, and you could be pressed into accepting a settlement that was less than you otherwise would accept. Also, attorneys are not banks and they simply can't afford to operate their law practice and be a lending institution as well.
2. Banks and traditional lending institutions do not have the skills to evaluate personal injury lawsuits and thus, will not lend money to someone whose primary asset is their lawsuit.
About seven years ago, this void in the financial system started to be filled by a number of entrepreneurial companies - some good, some bad. It was a rather strange group consisting largely of lawyers, wall streeters, and well-heeled business people. They used their own capital to fund cases and a new industry was born.
In these early years fees were very high and contracts very severe. While rates generally ranged from 3% to 6% per month, it was not uncommon to see contracts with rates of 15% per month, compounded! Contracts were also very Byzantine. However, rates have steadily come down and contracts, while not exactly consumer friendly yet, have become less severe. In short, the business was maturing into a responsible part of the specialty finance industry.
However, over the past two years or so, American Cash Flow Corporation[2], a "marketing" company with a rather checkered history, targeted the industry for promotion. Since then, the lawsuit funding industry has resembled a Wild West gold rush attracting an unbelievable number of "get-rich-quick" rip-off artists, amateur lending brokers with no experience and just plain folks who paid their $5,995 ($2,495 for the tape course) to become a "cash flow broker" and are trying to make their fortune.
Virtually all of these "cash flow brokers" are just that - brokers. They do not invest their own money to fund lawsuit advances. However, they all do have websites that trumpet their expertise without revealing that they have none and are not acting as principal. If you are not careful dealing with them can make your situation worse - much worse.
Tips for shopping for a lawsuit funding:
o Deal with a company that is investing for its own portfolio. Otherwise, you could wind up paying a great deal more than necessary. Do not deal with brokers - someone has to pay the brokers fee and that someone is you! Would there be so many brokers if their commissions were not high?
o Deal only with certified websites. When applying online, deal with a website that has the seal of Trust-e or one of the other recognized non-profit website privacy confirmation organizations. Your personal information may be used improperly.
o Do not supply information that is not otherwise discoverable. Certain information is privileged (between you and your attorney) but that privilege is lost once it is shared with a third party. An inexperienced funding company may require information about your case that, once in their possession, will lose its attorney-client privilege and may be subpoenaed by the defendant. Experienced companies like CapTran http://www.captran.com never ask for this type of information.
o Look for the best rate. Some companies like CapTran offer best rate guarantee. If CapTran approves a case and makes an offer, they will match or beat any legitimate competitor's written offer or pay you $200. (You only get the $200 if they fund the case or you turn their offer down for some other reason.)
o Do not make multiple applications with different funding companies. First of all, you have no way of knowing if that company is going to try to sell your deal to one of the others to which you have applied (which will not sit very well with the real funding source). Multiple applications create a nuisance for your attorney since he or she will have to complete many requests for information. Your best bet is to make an informed choice and work with that company.
o Check with your attorney. Never sign a complicated contract such as a lawsuit funding agreement without first consulting with your attorney.
Questions to ask a funding company:
1. How long have you been in business?
The lawsuit funding industry is very young and has a great number of brokers and inexperienced companies with no real money. A sure tip-off is if the company advertises a mind-boggling array of financial products and services including note purchasing, account receivable financing, structured settlements, purchasing of lottery winnings etc. They simply want to shop your funding application until they find someone with money to fund it. Meanwhile, nothing is really happening with your application. If a company advertises that they work with a "network of investors" it simply means that they have no real funds of their own and therefore, cannot make a funding decision themselves.
2. How many cases have you funded (approximately)?
CapTran for example, has handled over 10,000 funding requests and invested in several thousand of them.
3. Do you use your own money or are you a broker for others?
Be wary of companies that are members of the American Cash Flow Association as they almost certainly have no experience. Also be wary if a human never answer the telephone, as that is surely an indication of the level of service you are likely to get.
4. Who owns your company?
5. What is their business experience?
6. Do you have lawyers and paralegals on staff?
7. What the Annual Percentage Rate (APR) you charge?
(If you are quoted a monthly rates see the next question.) You will probably be told that it depends on your case, which is true, but they can tell you what they charge for a typical case. If they tell you there are no typical cases hang up and go the next company on your list. You should expect to pay simple interest rates as low as 2% per month for a case where strict liability standards apply; 4% to 6% for a typical auto case, and; 6% or higher for medical malpractice. ANY rate higher than 7% per month can be bettered with a little shopping.
8. Are your monthly fees compounded?
Many companies advertise deceptively low rates but load up the contract with many charges and monthly compounded rates.
The most common practice is to charge an application fee and/or a closing fee that is sometimes 10% or more of the amount you are advanced. If you contract for $10,000 you might be charged an application fee of $500 AND another fee equal to 10% or $1,000 - a total of $1,500 in fees. Now, here is the best part - you will have to pay interest on $11,500 - interest on the $1,500 you didn't even get! In this example, if you were charged a 4.00% compounded monthly rate the true annual cost is not 48% but 75%! In this scenario it would be cheaper to take a 6% simple interest rate from someone else.
DO NOT AGREE TO PAY COMPOUNDED RATES!
Almost every client we deal with thinks that their case will settle in a short while, but personal injury cases can drag on and on for many reasons and those compound fees can eat up all of your settlement if your case takes much longer than you anticipate.
9. Do you charge any fees or discounts of any kind?
This is very important as some firms charge a low monthly rate but add on application fees, discounts and other hidden charges that will dramatically raise the cost.
10. Will you send a sample contract to my attorney?
Any reputable company will do this.
11. Can you give me an attorney with whom you have done business for a reference?
Any reputable company will do this also.
12. Are you a member of the Better Business Bureau? http://www.bbbonline.com
CapTran is a member of the BBB online and subject to mandatory dispute resolution.
13. If not, do you have a mandatory dispute resolution policy? What is your rescission policy?
CapTran's policy allows for rescission for up to 5 business days after funding.
If you follow these tips and ask these questions, your chances of finding the right funding company and the best deal for you are excellent. Armed with a little preparation and the age old admonition, caveat emptor - let the buyer beware, you can successfully obtain a pre-settlement advance that allows you to stay the course and get a much better case settlement.
Footnotes
[1] This is a complicated topic but, generally speaking, if repayment of any part of the principal or interest is contingent on an event that is "more than a mere colorable hazard", the transaction is not considered a loan and not subject to usury laws.
[2] American Cash Flow Association(TM) ( ACFA ), also known as the American Cash Flow Institute (TM) ( ACFI ), American Cash Flow Corporation(TM) ( ACFA ), National Mortgage Investor's Institute ( NMII ), Diversified Cash Flow Institute (TM) ( DCFI ), among many other names - were all founded by Orlando lawyer Laurence J. Pino , who reprimanded by the Florida Bar Association for misusing an investor's funds.
On June 20, 2003 the State of Tennessee issued a Cease and Desist Order in which the State charged that American Cash Flow Corporation together with 12 related businesses and 12 named individuals "operated an illegal securities scheme that promised to make investors through the business of brokering "cash flow transactions". Pino was cited by the Attorney General of Tennessee in 1996 for a similar scheme under the name of Diversified Cash Flow Institute (TM). At that time DCFI paid fees and costs to the state of $10,284 for violating the Tennessee Consumer Protection Act of 1977.
Noted Columnist Jane Bryant Quinn also wrote disparagingly about Pino and his operations in The Washington Post 0n June 18, 1998 "Note Brokering: Harder Than it Sounds"
"Pino, 46, a lawyer in Orlando, Fla., describes himself as an "exceptional business trainer." His seminar experience goes back to 1983 - not always in the best of company. He first lectured for huckster Charles J. Givens Jr., who ran some dubious financial-planning organizations. In 1993 and again in 1996, juries decided that Givens had committed fraud. Later, Pino taught for Dave Del Dotto, an earlier popularizer of "cash flow," who settled an FTC action in 1996 with a $200,000 fine. (Del Dotto went bankrupt; the FTC says he never paid). Pino himself was reprimanded by the Florida Bar Association in 1988 for misusing an investor's funds."
And in Newsweek reporter: Show Me The Money" "Larry Pino's pricey cash-flow workshops plug an easy way to get rich quick. It's a real business, all right -- but there isn't much easy or quick about it."
Wayne C Walker
President of Capital Transaction Group Inc
http://www.captran.com
"CapTran" a leader in Litigation Financial Services
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