Legal fee loans, the answer to law firm liquidity issues?

One of the biggest un-reported stories of the last 120 days is the impact the banking and liquidity crisis is having on many of the legal lending and legal financing firms. In particular, the reassessment by major lenders and hedge funds that were the real forces behind the lending capacity of many firms as to the risks and rewards of law firm lending has caused a massive contraction in the amount of lending capacity available.

Several of the big name firms are literally out of the lending side of the business at the moment and are simply servicing the loans they already have on the books, hoping to hang on until market and business conditions improve and their ability to extend loans again resumes.

The impact on both large and small litigation firms is just now being felt as firms scramble to renew credit lines or apply for new credit on new cases. Also, the Vioxx cases are just now being paid to claimants, and attorneys are being paid back and are paying back a lot of their loans and financing, we need to wait and see if this infusion of loan repayments to lending firms brings with it additional capital for lending or if the hedge funds and banks simply hang on to these loan repayments and retreat permanently.

The reason this has an impact on the structured settlement industry is that there still is a very unique lending option available to attorneys who either structure a new legal fee or currently is receiving a structured legal fee on a prior structure. It is a Legal Fee loan and is available on a case by case underwriting basis.

One of the first questions I invariably get is whether or not this is a factoring transaction of a fee structure and the answer is a clear NO. It is a loan, typically of 75% to 80% of the remaining present value of the annuity, with the balance held as a reserve to pay future taxes, and requires a standard loan application, credit underwriting and full recourse for payment. However, what it is for high income and high tax rate attorneys is a means to get at cash tied up in legal fees using a method that won't create negative tax implications in future years and with a guaranteed repayment stream.

Watch the attached interview I did with Matt Bracy of Settlement Capital, the firm which offers and underwrites these unique legal fee loans for lawyers.