A recent Credit Suisse survey revealed the number of millionaires in the world is expected to increase by 40% during this decade. In 2021, there were 62.5 million people with at least $1 million. By 2027, that number will be closer to 87.5 million people.
Have you gathered an impressive portfolio of cash, stocks, bonds, real estate, cryptocurrency, and other investments? If so, understanding how lawsuits can devastate personal wealth is important.
You might think you’re in excellent financial shape, but all it takes is one lawsuit to wipe out your personal wealth. Let’s discuss how lawsuits could impact your finances and go over what you can do to protect assets from lawsuits.
Financial Consequences of Lawsuits
Lawsuits have become more prevalent in the US. than ever before. The Institute for the Advancement of the American Legal System reports that about 100 million people file lawsuits on the state level each year with another 400,000 people filing them on the federal level.
At the same time, the cost of defending a lawsuit has gone up substantially. Check out the financial consequences of lawsuits so you know which expenses you’ll face.
Legal Expenses and Financial Burdens
When someone files a lawsuit against you, it might not cost them anything. Many lawyers work on a contingency basis when helping clients file lawsuits, so they’ll only gain payment if they can help them earn settlements or judgments.
If, however, you need to hire a lawyer to defend you during a lawsuit, it’ll be a different story. The average rate for an attorney is about $313 per hour. With the average lawsuit taking nearly a year, you may spend tens or even hundreds of thousands of dollars in legal fees.
The financial risks of litigation explain why you might consider negotiating a settlement with the plaintiff in your lawsuit even if it costs you dearly.
Loss of Income and Credit Damage
You’ll lose more than money while defending yourself during a lawsuit. You’ll also miss work to attend court hearings. It could affect your income, especially if you’re forced to take an extended leave of absence.
It could affect your credit, too. Fortunately, you won’t have to worry about a judgment from a lawsuit impacting your credit score. According to the Consumer Financial Protection Bureau, judgments are no longer listed on credit reports. But if you take out any loans to pay legal fees, your credit score could drop.
Hidden Costs of Lawsuits
When facing a lawsuit, the financial impact it could have might be the first thing that comes to mind. How lawsuits can devastate personal wealth may be the only thing you can think about.
But other hidden costs can take a toll. Find out what they are below.
Emotional Toll and Mental Strain
If you’re like many Americans, you already suffer from enough money-related stress. A 2022 American Psychological Association survey found that about 66% of people routinely stress out about their financial situations.
When you’re involved in a lawsuit, you’ll likely stress over money even more, as you’ll face numerous bills and expenses. You’ll need to spend time and energy on the legal case, diverting your attention away from personal and professional pursuits.
During the lawsuit, you’ll likely feel overwhelmed and uncertain about the future, ruminating on and fearing the potential outcomes. All of these stressors could impact your emotional state and cause mental strain.
Long-Term Financial Impact
The majority of Americans agree the smartest way to build long-term wealth is by making smart investments. About 45% of adults say investing in real estate is the right approach, while about one-third say investing in the stock market is the way to go.
No matter which investments you prefer, a lawsuit could prevent you from investing as much money as you would like. It could limit your ability to reap the long-term financial rewards of investing.
Impact on Business Operations
Depending on which reports you believe, anywhere from 36% to 53% of American businesses face lawsuits each year. This astonishing statistic suggests you will likely face a lawsuit one day if you own a business. Here are ways lawsuits can be detrimental to businesses.
Disruption to Revenue and Reputation
While your business is busy fighting a lawsuit, you might not be able to devote enough resources to develop new products and/or services. It could reduce your revenue dramatically.
A lawsuit can also be bad for your company’s reputation. People might shy away from buying anything from your business because of it.
Risks for Small Businesses
Small business bankruptcies increased by 13% between September 2022 and September 2023. Not all of these bankruptcies stemmed from lawsuits, but many did. It shows just how devastating a single lawsuit could be to your business.
Types of Lawsuits That Can Affect Personal Wealth
You could face many kinds of lawsuits throughout your life. Read up on the prevailing lawsuit types that devastate personal wealth.
Personal Injury Lawsuits
Personal injury lawsuits are often associated with cases involving:
- Auto accidents.
- Slip-and-fall accidents.
- Workplace accidents.
- Wrongful death.
- Medical malpractice.
Learning about the differences between personal liability vs. limited liability lawsuits may help you protect your personal wealth.
Contract Disputes
Contract disputes are another leading cause of lawsuits in the U.S. Some reports suggest almost 10% of contracts cause disputes.
Employment-Related Lawsuits
Employment-related lawsuits involve former or current employees suing employers and alleging:
- Unpaid wages.
- Wrongful termination.
- Harassment.
- Retaliation.
- Discrimination.
Property Disputes
Property disputes typically involve everything from boundary disputes and title issues to landlord/tenant disputes and land-use issues. They’re complicated lawsuits and can be costly.
Divorce Proceedings
The CDC reports almost 675,000 divorces per year. Divorces can cost high-net-worth individuals millions of dollars.
Real-Life Examples of Lawsuits Devastating Personal Wealth
Many real-life examples showcase how devastating lawsuits can be to personal wealth. See some of them below.
Celebrity Lawsuits
Quite a few celebrities have had their financial worlds turned upside-down by lawsuits. A good example is Amber Heard, who had to pay ex-husband Johnny Depp $1 million following a defamation suit after she accused the actor of domestic abuse.
Small Business Owners Facing Litigation
A family-owned hamburger restaurant in Stockton, CA, that had been open for almost 40 years closed down in 2023 after facing a disability lawsuit from a customer who was unable to enter the restaurant because it wasn’t outfitted with a ramp. The owner faced up to a $75,000 fine for not complying with the Americans with Disabilities Act in addition to mounting legal fees.
Individuals Involved in Car Accidents
Los Angeles businessman and millionaire James Khuri paid more than $18 million to the family of a 32-year-old woman who died after Khuri’s 17-year-old son slammed into her car while driving over 100 miles per hour.
Product Liability Cases
Cy Elmburg, the founder and CEO of gas can manufacturer Blitz USA, filed bankruptcy and sold his company after 42 product liability lawsuits were filed against it.
Strategies for Mitigating the Financial Impact of Lawsuits
Knowing how lawsuits can devastate personal wealth is only half the battle. You also need to know how to mitigate the financial impact of a lawsuit. Here are several strategies.
Insurance and Asset Protection
Unfortunately, about 14% of American drivers roll the dice and drive around uninsured. If you don’t have auto insurance and you’re involved in an accident, it could put your personal wealth at risk. Simply signing up for car insurance and other forms of liability insurance can protect it.
Putting together an asset protection plan with the help of an experienced lawyer could also stop a lawsuit from doing irreparable harm to your finances.
Precautionary Legal Measures
Certain precautionary legal measures can lessen the chances of a lawsuit later. For example, asking your employees to sign a document acknowledging they read through your company’s handbook could prevent them from filing a lawsuit alleging wrongful termination if they’re fired for an offense mentioned in it.
Alternative Dispute Resolution Methods
Companies have utilized alternative dispute resolution (ADR) methods for decades. They include:
- Mediation.
- Arbitration.
- Negotiated rulemaking.
- Neutral factfinding.
- Minitrials.
These methods could help you and your company settle disputes outside courtrooms.
Financial Planning and Risk Management
Doing the proper financial planning can stop lawsuits from pulverizing your personal wealth. Consider setting up an offshore trust to keep assets safe.
Financial Recovery After Lawsuits
There is a strong correlation between costly lawsuit settlements and net worth decreasing. Even if you take the right precautions, a lawsuit can still leave you devastated. Recover financially by taking these steps.
Rebuilding Wealth After Litigation
You were able to build personal wealth once, so there’s no reason why you can’t do it again. Look into the smartest ways to invest your money.
Long-Term Financial Planning
A 2023 survey found about two-thirds of American adults admit their financial planning needs improvement. Meet with a financial planner to begin building personal wealth back up.
Speak with an asset protection lawyer, too. Ask how to protect your personal wealth better this time around.
Let Us Help You Keep Your Personal Wealth Safe
Facing a lawsuit can be scary. It can also put your nest egg at risk.
Now that you know how lawsuits can devastate personal wealth, speak with Attorney Blake Harris about establishing an offshore asset protection trust. Contact us for more information.
