It may have started with an auto accident, medical malpractice, or wrongful discharge from your job, but you now find yourself in a financial bind with no income and an ever-increasing stack of unpaid bills. Your lawyer may have started the claim process to recover damages, but lawsuits take time. Insurance companies know that dragging out a case puts financial pressure on you to settle for less. Often, this forces plaintiffs to settle for pennies on the dollar.
There is, however, another way to get money right away to ease the pressure and anxiety caused by unpaid bills. Pre-settlement loans make it possible for you to immediately get a portion of the value of your lawsuit without being forced to wait until there is a settlement or judgment. The process is simple and the typical settlement funding company website or advertisement promises a decision on your application within 24 hours.
It may sound too good to be true, but according to available sources, litigation funding provides more than $100 million in pre-settlement lawsuit loans each year to plaintiffs. Lawsuit loans are not for everyone and they should be used as a last resort. If you need cash while waiting for your settlement, make sure to consider any available alternatives before seeking settlement funding.
Here is everything you need to know about pre-settlement lawsuit funding to help you to make an informed decision.
What is pre-settlement funding?
The business model on which the pre-settlement loan industry is based looks at the potential settlement or judgment in a pending lawsuit as an asset. Funding companies allow the plaintiff, who is the party on whose behalf the lawsuit was filed, to access a portion of the value of the lawsuit immediately. The funding is structured as an advance against the anticipated settlement or judgment awarded after trial.
Advertisements and funding company websites use a number of different names in addition to pre-settlement loans to describe their services, including:
- Lawsuit loans
- Pre-settlement funding
- Lawsuit settlement loans
- Lawsuit cash advance
- Litigation funding
- Pre-settlement lawsuit funding
Regardless of the name used for it, the ability to access some of the money you expect to receive from your personal injury lawsuit may be the financial lifeline that makes it possible for you to pay medical bills and living expenses. Think of it as you would travel insurance that no one wants to be forced to use, but it is comforting knowing it is there should you need it.
Pre-settlement funding is not limited only to personal injury lawsuits. As the heir awaiting an inheritance from the estate of a deceased relative, there are funding companies that offer money as an advance against your share of the estate.
As someone receiving payments through a structured settlement, you too may benefit from lawsuit funding. Instead of receiving all of the proceeds from a lawsuit in a lump sum, a structured settlement is a type of annuity that provides periodic payments over the course of several years. If you need money right away, a funding company gives you a cash advance against future payments under the structured settlement.
How does a pre-settlement loan work?
Pre-settlement loans do not work in the same way as borrowing money from a bank, credit union, or another traditional lender. For example, when you apply for a personal loan with your bank, the application asks for a lot of information about your income, assets, and other debts. The lender will, as part of the application process, request a credit report to evaluate your ability to repay the loan.
The application you complete for a lawsuit settlement loan does not ask about your finances, employment, or ability to repay it. Instead, you will find that other than asking for your first name, last name, phone number, and other contact information, the focus of the application process is on the lawsuit and the name and contact information of the attorney handling it for you.
After the litigation funding company obtains information and documents from your attorney, it evaluates the lawsuit to determine the likelihood that it will end with a judgment or settlement in your favor and its anticipated value. The amount of the cash advance is a percentage of the value of the lawsuit.
The reason the application process focuses exclusively on an evaluation of your lawsuit and not on your ability to repay the money is that a lawsuit loan is a non-recourse advance, which means you cannot be held personally liable for it. The money advanced to you is repaid, along with interest and any fees charged by the funding company, if and when the case results in a settlement or judgment in your favor. If you lose or do not receive enough to repay what was advanced to you, you are not responsible for it. It also does not affect your credit score as would a traditional loan.
How much can I get?
The amount a company agrees to give you through pre-settlement funding depends on the strength of your case and its value. In other words, the company is convinced that the evidence and facts of the case prove you will win and recover a monetary award or settlement.
The amount that you get is usually somewhere in the range of 10% to 20% of the value the lawsuit loan company places on the case. What percentage a company agrees to advance depends entirely on its evaluation of the lawsuit, but it takes into consideration the costs of the lawsuit, including court fees and other litigation expenses as well as the fees charged by your lawyer that must be paid first from a settlement or award.
What happens if I lose my case?
Your agreement with the settlement funding company contains all of the terms and conditions, including fees, interest rate, and repayment, pertaining to the lawsuit cash advance. Review it with your lawyer to make certain that you owe nothing in the event that you lose the case or the settlement or award is not enough to repay the entire amount of money that you received through an advance along with the interest charge and fees on it.
To gain a better understanding of why you owe nothing if you lose the case, it may help to think of a lawsuit loan as an investment by the settlement funding company. As with any investment, the company risks losing its money if its evaluation of the lawsuit was incorrect, but if it was right, it reaps a profit through the fees and interest it charges for taking that risk.
How long does it take to get a settlement loan?
The length of time from your lawsuit loan application to approval varies from company to company and case to case. A few key factors determine how long the process takes:
- Your law firm’s responsiveness – always let your attorney know which company or companies will be contacting them. Obviously, the funding company cannot make a decision until they receive information about your case.
- The complexity of your case – a rear-end car accident claim is easier to review than a contested medical malpractice claim.
- Prior funding payoffs – if you received lawsuit settlement funding in the past, any new funding company must pay them off. Some companies are very slow to provide payoff letters upon request. Be sure to collect a payoff letter from the prior lawsuit lending company yourself to provide to subsequent firms.
Talk to your lawyer about lawsuit loans before making a decision about a company and submitting an application. Lawyers, particularly those handling personal injury lawsuits, may be valued resources for advice and guidance. Involving your lawyer in the early stages of the decision-making process may help ensure cooperation with the funding company.
How many loans can I take out on a settlement?
Depending upon how long it takes to settle a lawsuit, you may find yourself in need of additional financial assistance after you already took out a loan against the settlement proceeds. Fortunately, there is no limit to the number of times you can apply for a pre-settlement loan.
The company you apply to for a lawsuit settlement loan evaluates the case to determine the potential value of a settlement or judgment. You may take a portion of that potential value regardless of whether you take it in one advance or in multiple advances.
Can I get a loan on a class-action lawsuit?
Yes, several pre-settlement funding companies advertise advances on class-action or mass tort claims. Class actions can take a long time to finalize. It can take years until there is a settlement or judgment entered in favor of the class. Sometimes, class actions can get a portion of their settlement funds in advance from lawsuit funding companies instead of waiting.
As long as the relief granted to plaintiffs in a lawsuit will be a monetary settlement or judgment, the case may be eligible for pre-settlement loans. Types of lawsuits that may be eligible include the following:
- Class actions
- Medical malpractice
- Breach of contract
- Personal injury cases, such as premises liability, wrongful death, and motor vehicle accidents
- Wrongful termination
However, cases in which plaintiffs only seek an injunction or other non-monetary relief would not qualify.
What to look for when considering lawsuit settlement funding?
Countless lawsuit loan companies want your business, but the challenge is finding a reputable one offering the lowest cost and favorable terms. The best way to find one is by shopping the marketplace and getting a quote from several companies. Our How to Compare Lawsuit Loans guide gives you step-by-step instructions on how to do this.
Among the things to take into consideration and discuss with your lawyer before choosing a company include:
- Interest rate – interest rates in the industry are high. This is partially because the industry is unregulated. It also reflects the risk taken by the settlement funding company. Ask whether the company charges simple or compound interest. Compound interest means that you pay interest on accumulated interest. Simple interest means that you pay interest only on principal. All else equal, compound interest is ALWAYS more expensive.
- Fees – ask the lender for a list of all fees charged for the loan to avoid hidden fees. Some companies may add an application fee, underwriting fee and other charges on top of the interest they charge. Some companies also try to hide fees with a large delivery fee. Unlike other fees, the delivery fee is deducted from the amount you receive rather than added to the balance.
- Online reviews – look for a company with solid online reviews from a variety of sources.
Avoid any company that refuses or hesitates to give you information about the terms and cost of using their services. Reputable companies want you to be in a position to make an informed decision before accepting a lawsuit cash advance.
Lawsuit loans can be an expensive way to get money for living expenses, so never rush into a decision. Get all of the facts about costs and terms from different litigation funding companies and discuss them with your lawyer. Working with a lawsuit loan company may offer a solution to financial pressure as you await the settlement of a lawsuit, but remember that it comes at a steep cost.