Funds advanced before suit is settled

[dyne]

I saw on TV an ad from an orginazation which will advance funds to a person who is waiting on a settlement of a suit. The ad said that if the person lost the suit the amount advanced would not have to be repaid. The question which occurred to me is whether the funds are taxable or not. Since the funds are not required to be repaid, it appears that it would be taxable. Is anyone familiar with this?

[Koss]

Lawsuit Cash Advance

You wrote:

Since the funds are not required to be repaid, it appears that it would be taxable.

This is not accurate. The funds must be repaid from the proceeds of the settlement. If there is no settlement, or if the settlement is not enough to repay the advance, then the borrower is not personally liable. The advance is effectively a loan that is secured by the borrower's interest in the settlement proceeds of the pending lawsuit. The lender holds a lien on the settlement proceeds.

This seems a lot like a nonrecourse loan.

If there is no settlement, or if the settlement is not enough to repay the advance, then there might be a taxable cancelled debt. But that would only occur in the year in which the case is concluded.

There is no taxable income at the time the advance is received.

These firms do not advance money unless it is fairly certain that there will be some sort of settlement, or an award following a trial. And they only lend a portion of the estimated value of the settlement. And they charge outrageous interest rates. It is extremely unlikely that the settlement will be insufficient to repay the advance. If the case goes very badly, then it might be just enough to pay the lawyer, and then repay the advance. The lender might not get any interest.

I know a little bit about tort litigation. These firms advance money in cases where it is crystal clear that the defendant is liable for the plaintiff's injuries. The only question is: How much is the case worth?

BMK