Why Passing Through Third-Party Interest Benefits Plaintiffs, and How Advocate Capital Makes It Simple
In contingency fee litigation, law firms often face a critical decision: how to handle the cost of financing case expenses. Expert witnesses, depositions, technology, and medical records can add up quickly, and firms must decide how to pay for their case expenses and recover the cost from their client at the conclusion of their case.
The Problem with Charging Interest on Case Expenses
When a law firm uses its own capital to fund case expenses, it may consider charging clients interest to offset the cost of that money. While this approach is common, it can raise ethical and logistical questions. Here are a few of the issues that law firms that charge interest on their own will need to be aware of:
1. Ethical and regulatory uncertainty: Depending on the jurisdiction, there may be limits on what rate is appropriate or ethical concerns about whether the interest constitutes a “profit” on client funds.
2. Tied-up firm capital: Self-funding case expenses puts the full financial burden on the firm while waiting months or years for reimbursement, tying up capital that could otherwise support growth, hiring, or marketing.
3. Complex tracking requirements: Case expenses and interest must be tracked accurately on a case-by-case basis to ensure the proper recovery of all costs and compliance with applicable ethical and legal guidelines.
4. Compliance and risk considerations: Firms must consider state ethics rules, possible consumer lending requirements, IRS implications. For example, interest income must be reported on a separate line for tax purposes.
5. Operational and training challenges: Staff must be properly trained to accurately track case expenses, calculate interest, and provide clients with detailed, itemized documentation at the conclusion of each case.
6. Changing interest rates: Changing rates can make calculations more complicated and increase the chance of inconsistencies.
7. Documentation demands: Firms must maintain clear, accurate, and client-ready documentation to justify all charges accurately and effectively.
Taken together, these challenges make charging interest on self-funded case expenses both time-consuming and potentially risky.
The Advantage of Passing Through Third-Party Interest
By financing case expenses through a reputable third party, such as Advocate Capital, a firm can pass through the actual third-party interest expense to the client in a manner that is ethical, transparent, easy, and IRS-compliant. This approach offers clear advantages:
1. Client Transparency and Fairness
Passing through the true cost of funds keeps the client informed and avoids the perception that the firm is earning interest on their case. It ensures that the client pays only for what it costs to pursue justice, not an inflated or uncertain rate.
2. Stronger Financial Position for the Firm
When a firm utilizes Advocate Capital’s case expense funding, it preserves its working capital for other critical needs, such as payroll, marketing, and firm expansion. The firm no longer has to choose between taking a strong case and managing cash flow.
3. Ethical and Compliant Funding Practices
Many state bars permit passing through third-party interests when they reflect the true cost of borrowing. This helps firms stay compliant while still recovering necessary costs.
4. Better Case Outcomes for Clients
With financing available, firms can fully invest in expert testimony, demonstrative evidence, and other resources that strengthen their client’s case, without hesitation due to cost. Clients benefit directly from the firm’s ability to build the best possible case from the start.
5. Case-by-Case Borrowing Cost Tracking
Our proprietary software platform, AdvoTrac®, tracks borrowing on a case-by-case basis, allowing law firms to get reimbursed for 100% of the cost of our services on cases they win.
6. Dedicated Team and Unlimited Free Training
Our support team is made up of paralegals, accounting professionals, and former law firm administrators who are all experts on AdvoTrac®. So, you won’t need to hire someone new or create extra work for an existing employee to track case expenses and borrowing costs. AdvoTrac and our team of friendly experts are here to partner with your firm and support you throughout the process.
We provide our clients with unlimited, free training on AdvoTrac and its interactions with law firm accounting and case management systems, such as QuickBooks and Needles. Our training team has also created videos and PDF training materials, which are located on the AdvoTrac web portal.
How Advocate Capital Makes It Easy
Advocate Capital’s case expense financing program is designed to simplify this entire process. The system tracks case-by-case expenses, interest, and repayments automatically, making it easy for firms to accurately and transparently pass through third-party interest to clients.
With Advocate Capital:
1. Every expense and its related interest are clearly tracked.
2. Firms can easily generate detailed reports for client disclosure.
3. Attorneys maintain complete control while freeing up cash flow.
It’s a win-win for both law firms and their clients: firms remain financially strong and ethical, while clients benefit from better-funded, better-prepared cases.
The Bottom Line
Passing through third-party interest isn’t just a sound financial strategy; it’s a client-first approach that promotes growth, transparency, fairness, and better case results. With Advocate Capital’s streamlined funding solutions, trial law firms can focus on what they do best: fighting for justice. Contact us today to learn how our case expense funding can support your law firm.
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