According to a story in the New York Times, published March 19, federal prosecutors are investigating finance companies that provide cash advances to plaintiffs in personal injury and other lawsuits.
Because lawyers are banned from providing financial assistance to clients involved in litigation, it is not uncommon for plaintiffs who need money quickly to either settle their claims for less than their value or to seek help from these companies which offer cash in exchange for repayment out of a future judgment plus interest. And it is that interest that raises concerns because it is often extremely high.
Again, due to the fact that lawyers can't help clients financially, it is also not uncommon for lawyers to suggest to their clients to go to the financing companies for help. In fact, many of the cash-advance firms rely on lawyers to send them financially unsophisticated clients who are waiting to collect on legal settlements. And this is also under investigation.
According to the story, federal prosecutors in Manhattan are seeking information about the business relationships between the cash-advance firms and the trial lawyers who sometimes refer their clients to the firms, apparently looking into whether there were formal financial arrangements between the parties, which could be construed as illegal kickbacks.
Those who defend the financing industry argue that it provides a crucial service, allowing customers to afford basic expenses and to hold out for potentially more attractive settlements instead of automatically accepting defendants’ initial offers.
This is true but it does not necessarily justify the high interests which appear to be abusive. But the industry responds to this argument by saying that the high interests charged are justified because the recovery of the financial advances are not guaranteed. If the plaintiff does not recover a judgment in their favor, or if it is too low, the company does not recover its investment.
In response, a few states have imposed ceilings on the interest rates on settlement advances, which might be a good way to achieve an acceptable compromise. State legislators in New York have introduced similar legislation.