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Opinion

Misconception of Conflating Plaintiff Financing with Payday Loans

August 7, 2015
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3min read

Critics of the system of financing plaintiffs sometimes try to lump plaintiff financing and payday loans in the same sentence; so much so that a common misnomer for plaintiff financing is “lawsuit loan.” However, they couldn’t be more different. First, payday loans are loans. The borrower has to pay them back no matter what, and if they can’t, then they get hit with late fees and may go into debt. As we’ve discussed many times, plaintiff financing is not a loan at all – it’s an investment. Plaintiffs pay their funders back only if they win their case. There is no such thing as a late fee in this process, because money is only due at settlement. But because a payday loan is a loan, it is subject to state usury laws. Because plaintiff financing is not a loan, it is not.

States understand the difference, too. Take New York, for example. In 2012, the New York Attorney General informed one of his companies that usury laws applied to his loans, even if the lenders operated outside New York. Conversely, when the New York attorney general also got involved in legal funding in 2005, it was not to prevent usury, but instead to promote best practices for funding companies in order to ensure consumers who needed to be financed knew exactly what they were getting into. And NY is not alone. A number of states, including Maine, have even enacted laws and regulations to codify plaintiff financing into law.

Another key difference between plaintiff financing and payday loans is that payday loans are usually taken by people who don’t understand what they’re getting or what they will pay back. People who take payday loans rarely seek legal counsel to help them understand the transaction. On the other hand, almost everyone who applies for financing is represented by an attorney. In fact, almost every company that finances plaintiffs requires an attorney to sign off on the funding transaction, helping to make sure consumers are properly protected.

Finally, another key difference is that plaintiff financing  is often used as a legal strategy in order to end up with more money, not less. As we illustrate in this animated video about legal funding, plaintiffs who are financed can avoid the desperation tax charged by insurance companies and other large defendants trying to get desperate plaintiffs to accept early, low-ball settlement offers. Sometimes, attorneys recommend litigation financing to their clients to help them stay patient and avoid paying this tax — which can be massive. Like taking any investment money, the plaintiff and attorney hope that by giving up a piece of their pie, they will help make that pie larger..

Over the past decade, payday loan transactions have continually fallen under scrutiny, and their originators now tend to be less than reputable. See Mr. Brown, who was once a used-car salesman. To fully grasp the shadiness of the payday loan industry, check out John Oliver’s new tune. Plaintiff financing, however, has been gaining wider acceptance and attracting quality talent (if we do say so ourselves). Just last year a new company that finances plaintiffs, Gerchen Keller, was founded by 4 former U.S. Supreme Court clerks. Now we know why.

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