Litigation funding avoids long-term impact of other solutions
By AdvocateDaily.com Staff
While it may be tempting to file for bankruptcy or sell a primary residence when faced with the financial pressures of personal injury litigation, these short-term answers often carry long-term consequences — while a solution based on the litigation itself might be a preferable option, says Dawn Simons, client relations manager with CaseMark Financial.
As Simons tells AdvocateDaily.com, individuals who have been injured and are left unable to work usually have difficulty accessing credit, as credit cards, lines of credit, mortgages, term loans, and asset-based loans require not only collateral but proof of income and evidence from the borrower that they are able to service the loan.
However, she adds, most injured plaintiffs seek funding because their ability to earn a sufficient income has diminished or disappeared. This is usually coupled with an increase in expenses, due to medical or transport bills.
Although income replacement benefits exist for those who can prove they qualify, most only qualify for $400 a week, which is insufficient for most households to make ends meet.
As a result, Simons says, most people in this position face mounting financial pressures.
At this point, she says, many injured individuals are often ill-advised to file a consumer proposal — a step removed from bankruptcy where they can pre-negotiate a structure with creditors to make monthly loan payments that, over a period of time, should eliminate their debt and bring them into credit-worthy standing.
“Consumer proposals are a wonderful tool perhaps for somebody who is financially irresponsible or got in over their head but still has some sort of income. However, if a person doesn’t have the means to service the debt, then the consumer proposal is just a delay tactic which is going to end up costing them in legal bills and potential further credit issues,” says Simons.
Another suggestion might be filing for bankruptcy, which may eliminate unsecured debts such as credit card balances but forces them to liquidate any minimal assets that they have.
However, says Simons, bankruptcy follows a person’s credit file long-term — sometimes for five to seven years. Individuals may also have to disclose past bankruptcies on future credit applications, making them less credit-worthy, riskier borrowers who often have to pay higher rates of interest.
“Bankruptcies can have a very long time horizon with negative consequences.”
Bankruptcy also has implications for civil litigation as only certain heads of damages will be exempt from bankruptcy such as those for pain and suffering, she says.
“A knowledgeable bankruptcy trustee can make it extremely difficult for a personal injury lawyer to resolve a claim, or better yet, they can just take money from heads of damages that they do have access to, such as the loss of income portion.”
While plaintiffs may also consider selling a property to obtain money in the short-term, Simons says this may also be an ill-advised move, as it often results in a fire sale.
“For many borrowers, the home is the only asset that they may have. It’s their only positive investment — it’s the only nest egg or money that these people have. And so, if they’re forced to sell it without an income and under hasty circumstances, it doesn’t allow them to maximize the value, their market timing may be less than favourable," she says.
“We’ve seen people sell property in a haste, pay off personal debt thinking that the claim is going to resolve in six to 12 months, but litigation can drag on, and usually does drag on for years.”
At the same time, the property the individual sold will likely appreciate in value, while their debts continue to climb.
“When things go longer than expected, unfortunately, they’re really back to square one. And so they have a mounting debt problem and no asset,” says Simons.
As an alternative without the longer-term consequences, litigation loans isolate the incident to offer a solution based on the problems created by the litigation, rather than traditional credit factors.
“Why not explore financing options that understand the very nature of the borrower’s predicament and rely on the litigation to underwrite and make a credit decision?” says Simons.
Although some in the legal community may describe litigation loans as expensive or high-interest, Simons says it depends on what they are being compared to.
For example, she says, they may seem pricey for a borrower with a perfect credit score, no debt and a substantial investment portfolio, than what they can get from a traditional bank or lender.
“Even then, they’ll likely need to pledge some sort of asset as collateral and prove that they tick all the boxes.”
But average households are often already using credit cards and consumer retail credit with annual rates ranging from 20 to 32 per cent.
As Simons notes, the litigation loan is actually an alternative with less onerous terms than the consumer retail credit that was in a similar price band and already a daily part of life for these individuals prior to the accident.
Ultimately, she says, as the loan is based on the merits of the litigation, clients are not required to service the debt monthly, make interim payments and nothing is reported to the credit agency.
“CaseMark avoids credit scores and income requirements, shies away from traditional credit metrics, and doesn’t do something that will follow the borrower for years to come after the litigation has resolved,” says Simons.
The litigation financing is usually structured in a way so repayment occurs when the file resolves.
“When the litigation is concluded, so is the litigation funding. We move on. But if a person lost their house, if a person filed for bankruptcy — they always look back at that, it’s just a very real consequence.”