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Opinion

Introducing: The Desperation Tax

July 17, 2015
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3min read

Lawsuits are supposed to make harmed people whole again, but it’s not that easy. The legal system is flawed, defendants are savvy repeat-players, and the people and companies seeking justice often find themselves in desperate situations. The result is all-too-common: plaintiffs are forced to accept very low early settlement offers simply because they can’t afford to wait for justice to run its course.

At Mighty, we’ve coined the term “desperation tax” to refer to the disparity between the amount a plaintiff receives when they settle too early (out of desperation) and what their ultimate settlement would have been, had they endured the length of the lawsuit. That’s a tax nobody wants to pay.

Within a year in the United states alone, the desperation tax costs plaintiffs billions of dollars. To make matters worse, it disproportionately affects small businesses and people on lower rungs of the socioeconomic ladder – i.e., those without the financial flexibility to be patient.

So how can plaintiffs avoid the desperation tax? While the obvious solution is simply to hold out for a fair offer, that’s rarely as easy as it sounds. Oftentimes, plaintiffs have few economic resources to begin with, and when unexpected medical bills, legal fees, and injuries keeping them from work further exacerbate their financial woes, their situation can become, essentially, desperate. They could try to secure a loan from a bank or friends and family, but without good credit or assets to collateralize, it might prove impossible.

FORTUNATELY, EVERY PLAINTIFF DOES HAVE ONE NEW ASSET TO LEVERAGE: THEIR CASE.

Fortunately, every plaintiff does have one new asset to leverage: their case. The money plaintiffs are expected to receive from their lawsuits is technically an asset, but banks and other traditional financial institutions don’t have the legal expertise to evaluate them. To fill that void, the plaintiff financing companies emerged, specializing in understanding and valuing lawsuits and then investing in them.

Companies that finance plaintiffs, like all rational investors, only purchase stakes in meritorious cases. Nevertheless, there remains a risk of losing their investments because promising lawsuits aren’t always won, and sometimes, the money from lawsuits won cannot be collected from insolvent defendants at all. Since financing plaintiffs is an investment and not a loan, if a plaintiff fails to recover winnings from his case, he or she will still keep the cash advance and won’t owe the investor anything. As a result of the investor’s high level of risk and a number of other factors, the process of financing plaintiffs is usually very expensive.

Whether to take plaintiff financing is an important decision, and luckily, most plaintiffs are already represented by attorneys who can advise them and generally must sign off on any lawsuit financing agreement in order to finalize the transaction. Since the factors that go into making that decision are radically different for each plaintiff and set of circumstances, Mighty built an easy-to-use legal funding calculator to help plaintiffs and their attorneys weigh the options. We also produced a 2-minute animated video that explains the basics of financing plaintiffs, including a cameo by the desperation tax.

TO HELP PROTECT PLAINTIFFS AND ENSURE EQUAL ACCESS TO JUSTICE, THERE NEED TO BE MORE OPTIONS, NOT LESS.

Unfortunately for some, the choice has been made for them. In July of 2014, a Tennesee law went into effect that effectively removes plaintiff financing as an option for consumers who reside in that state. Suspiciously, that bill was championed by the largest defendants and insurance companies in the country – some of the biggest collectors of the desperation tax. These are the same groups that have for years lobbied state legislatures around the United States to reduce or even eliminate penalties for delaying good faith settlement offers to plaintiffs, ensuring that more and more plaintiffs have fewer choices. As a result of these actions, it’s likely that the desperation tax paid by litigants in Tennessee will noticeably increase now that defendants and insurance companies know that plaintiff financing is no longer an option for those litigants.

At Mighty, we believe that to help protect plaintiffs and ensure equal access to justice, there need to be more options, not less. Plaintiff financing, while imperfect, is an important resource that empowers plaintiffs to dodge the desperation tax and get more from their lawsuits.

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