How Can Creditors Use the Option of Litigation Finance for Recovering Unsecured Loans?

It is a known fact that when a person files for bankruptcy, it is an official declaration that they are no longer in the position to repay the loans they have taken. Depending on the type of bankruptcy they have filed for, their obligation to repay loans, particularly unsecured ones, is wiped off. Ultimately, the creditors who have granted unsecured loans are at the risk of facing major losses.

Unsecured loans are generally considered as high-risk loans, they generally come with a higher interest rate and are granted to people who do not provide any asset for collateral at the time of applying for a loan.

It is to be noted that not all unsecured loans are wiped off. In some cases, a person may have to repay the amount of unsecured credits they are liable for after the bankruptcy period is over. However, these cases are far and few and generally, they are not obliged to pay the loan amount.

A common way many unsecured creditors opt for, in order to recover the amount of unsecured loans, if the borrower has filed for the bankruptcy is litigation finance. In this option, they are financed by a third-party company so that they could file a case against the borrower. The plaintiff is obliged to pay a certain portion of the money they will receive from the borrower. This amount is decided in advance between the litigation funding company and the plaintiff.

A prominent benefit of opting for this method is that it can slow down the process of bankruptcy. In normal cases, by the time the creditors are made aware of the filing of bankruptcy by the borrower, they are generally not left with much time to make their claims in a proper way. In the event of using the litigation finance option, they will get ample time in hand to make a claim that has maximum chances of being proven in the court. Thus, there are enhanced chances of recovery of the amount.

Opting for this method of litigation finance can also help the creditors to meet huge expenses and costs associated with filing a claim. The third-party company involved provides them with adequate funds so that they could manage all these expenses and lawyer’s and witness’ fees efficiently. This way, they will not have anything else to focus on apart from strengthening their claims to boost the recovery.

Another vital benefit of going with this option for creditors is that it is risk-free from them. They are only liable to pay the litigation funding company if they have recovered the amount. If they aren’t able to recover the amount of unsecured loans, litigation funding company is not entitled to receive anything from the plaintiff. This is the major reason why litigation funding companies do not take every case that come to them. Prior to taking a case, they thoroughly investigate and evaluate it. They only invest their money in the case if there are maximum chances of recovery.

Even if they aren’t taking the case, the information they have derived from investigating and evaluating the case, it can come in handy for the plaintiff if they are making a claim. Hence, consulting a litigating finance company is in no way a bad idea for them.

Some unsecured creditors often have to settle for an amount much lower than they granted a borrower. This is done in order to avoid heavy losses caused if the borrower is declared as bankrupt and are no longer held liable to pay unsecured loans. With the option of litigation finance, they will not have to settle for a lower amount as there will be a high possibility of fast recovery of the amount with only a portion of the recovered amount going to the litigation finance company.

If the amount of the unsecured loan is huge, a litigation funder may purchase the complete claim from the plaintiff. They generally pay a huge amount to the creditor for the said purpose. However, this usually happens when they a deep understanding of the complexities of the case and they believe there are high chances of recovery to be made. This can prove to be a suitable option for the plaintiff as they can get the amount without having to face the legal hassles.

To cut the long story short, litigation funding is a risk-free situation for an unsecured creditor in every possible event. Not only it gives them the hope that their bad debts can be recovered but also provides them with the funds so that the claim can be prepared in a more effective way. Due to all these reasons, the trend of using this option is gaining popularity in different parts of the world.

Brandon L. Fernandez is a native of Fort Lauderdale, Florida, and is an associate in the Lydecker Diaz’s Miami office. Mr. Fernandez’s practice includes all aspects of federal and state civil trial litigation with a primary focus in civil rights litigation, complex commercial litigation, government liability, law enforcement liability, labor & employment law, premises liability, and professional liability.