Plaintiff’s attorneys fight hard in court, and fight even harder to earn a living. Though they can take home a rewarding 30% fee at the end of a case, this is only possible if a favorable settlement, judgement, or verdict has been rendered.
Plaintiff’s attorneys only take home what they win, and if they don’t win, they go home empty handed. The money that they do take home needs to fund current and future cases, keep the law firm afloat, and take care of other important daily expenses. In light of this precarious situation, it is essential that a plaintiff’s attorney understand all of the available options when it comes to handling fees.
Many attorneys take their earned money and reinvest it in their law firm’s operations, and this cycle continues until they retire. Some plaintiff’s attorneys use legal funding to take an advance on the fees they received from one case to springboard themselves into an even bigger case where the anticipated fees are much larger. There are also those attorneys who structure their fees so they get paid in installments instead of taking a lump sum.
All that should matter is whether or not the attorney gets paid, right? Well, it turns out that there are underlying benefits and drawbacks to each of the above methods of compensation.
Structuring Attorney Fees
An attorney who chooses to structure their fees essentially chooses to get an annuity. The largest benefit of structuring fees as an annuity is that the attorney will be allowed to pay a lower tax on the same amount of money. For example, receiving one million dollars all at once might place you in a much higher tax bracket for that year, increasing your taxes, but dividing it up as $125,000 over eight years may result in a lower payment.
One downside of the structured fee is that it occurs on a relatively rigid schedule. While knowing when you might expect your next payment does help with budget planning, this could become difficult in a time where access to capital is slim.
For example, in a situation where the next structured payment is a few months away but the attorney needs more capital to open a new case, pay staff, or perform other operational expenses, a structured fee might be problematic. In order to access the money in the structured fee, the attorney would have to break the agreement with the company that is structuring the fee, which would lead to penalties or further payments.
Another potential issue with structured settlements is that annuities are subject to inflation. This can be avoided if you were to choose an inflation adjusted annuity, but this type of deal is typically more expensive. Similarly, while current interest rates are at the lowest they have ever been, these are expected to rise soon.
If you are interested in structuring your attorney fees, insurance companies and specialized structured settlement companies offer such services.
Accelerating Your Post-Settlement Legal Fees
There are certain instances when a favorable outcome is reached, but due to court approvals, slow-paying defendants, or administrative delays, there is a lag in payment of the attorney’s fee. In such a scenario, an attorney can opt to accelerate a portion of their fee in the form of a post-settlement advance. In the legal finance space, such a transaction is referred to as post-settlement funding.
One potential downfall of post-settlement funding is that finance companies can only accelerate a portion of the attorney’s fee. The funding company will underwrite the advance for longer than the anticipated payment delay in case there are further unforeseen postponements. In addition, the funding company has to make a profit.
There is a lower risk of inflation with post-settlement funding because there is no scheduled payout. Knowing that the value of an accelerated fee will not change over time – and thus, the repayment rates will remain stable – is a huge benefit.
Many legal finance firms offer post-settlement funding in addition to other types of legal financing-such as pre-settlement funding, case-cost finance, and attorney lines of credit-but in different capacities. Some companies offer smaller advances with a short delay in payout. Others will only advance on larger fees or when there is a relatively long anticipated payment delay. If you think post-settlement funding makes sense for your practice, do your due diligence to find the company that best meets your specific needs.
Written by Joseph Genovesi, President of RD Legal Funding. Founded in 1998, RD Legal is one of the few companies that focuses exclusively on post-settlement financing. Their proprietary Fee Acceleration program provides contingency fee attorneys with advances that range from $20,000 to $20 million on virtually any type of case.