4 Techniques for Reducing Your Debt

With a personal injury, mass tort, class action or any type of plaintiffs’ law firm, reducing your indebtedness can oftentimes be dictated by factors outside your control—most prominently, how often and when your firm will receive compensation for its legal services.

But the inherently unpredictable nature of a contingent fee practice doesn’t always equal an insurmountable roadblock to repayment. There are numerous ways you can decrease an outstanding balance in spite of the ebbs and flows in your firm’s cash flow, four of which are outlined below. 

1. Pay more than the minimum

One strategy to reduce credit card debt is to pay more than the minimum amount due each month. The strategy is equally effective in the context of a law firm financing arrangement—remitting a larger payment than required (even if only slightly more) can be a practical way to shrink your obligations.

It has other benefits too. Generally, when you pay more than due, the surplus is applied to principal. This means that you’re steadily decreasing your interest payments, which are calculated based on the outstanding principal amount, merely by paying a little extra periodically.

Additionally, if you want supplemental financing, making such payments will improve your credit history, making it easier to borrow at a lower rate now and in the future.

2. Use lump sums to your advantage

Since revenues in a plaintiffs’ practice can vary widely from month-to-month, it may prove difficult to pay more than the minimum on a regular basis. Consider instead putting your more significant legal fees to use.

Paying down your balance with a large lump sum payment has the same benefits as paying more than the monthly minimum, but may be easier to accomplish if you have a firm that primarily handles mass tort, class action or complex personal injury litigations. Rather than chipping away at your balance, you’re taking a blow at it with an axe.

If your strategy is to rely on windfall payments from your cases to pay down your financing, then choose a funder who offers flexible repayment terms. Typically, agreements with traditional lending institutions have rigid requirements—providing for fixed, non-negotiable payment installments and, in some cases, mandating that you bring your firm’s balance to zero at least once during the life of the loan. Litigation finance companies, on the other hand, can structure payments based upon when you receive fees. 

3. Make budget cuts

Does it feel like it’ll be a lifetime before you’ll be able to repay or that your outstanding balance is spiraling out of control? Try making some budget cuts.

This doesn't mean cutting corners in case-related expenses, but rather, uncovering methods to operate your firm in a more cost-efficient manner.

Start by looking at your financials statements and assess which expenses you can live without versus those you need to run and manage your business. Eliminating unnecessary spending, consolidating or moving offices to save on rent, selling off assets or negotiating better prices with vendors, are all examples of how you can increase your cash flow to help reduce your debt.

4. Refinance

The primary reason to refinance, or replace one funding arrangement with another, is to get a lower rate and decrease your total cost of financing. When you’re paying a high rate, debt can really mount and could result in your firm becoming overleveraged.

The good news is that as litigation financing has increased in popularity over the years, so too have your refinancing options. You’re not limited to choosing either a bank loan, which may not provide adequate capital for your contingent fee practice, or non-recourse funding, which can be remarkably expensive. There are other alternatives that exist, such as getting a line of credit from a specialty funder and leveraging your contingent fees as collateral.

Generally, if you’re consistently taking out non-recourse financing against your cases, then you’ll likely be better off getting a recourse loan instead. While you’ll be 100% obligated to repay a loan, the lower cost of financing will free up money for your business in the long term.

Decreasing your firm’s level of debt using the foregoing methods has many advantages, not the least of which is that you reduce your obligations to a third party, but before you pay off your financing completely you should also ponder its benefits. Having an outstanding credit line or other form of funding can provide your firm much needed cash flow, as well as give you the opportunity to make investments. Thus, your primary goal should be to keep the amounts you owe manageable, not necessarily at zero, if financing improves your practice.