Reassurances from your attorney about the strength of the case does not help to relieve the stress and anxiety caused by a stack of unpaid bills and little or no income to pay them. When a personal injury, wrongful termination, work-related injury or illness, or type of incident gives you the right to file a lawsuit for compensation, waiting for the money creates financial pressure.
Too many people with pending lawsuits have insufficient income to give their lawyers the time needed to negotiate a settlement to give them the money they deserve. Instead, they fall for the tactic insurance companies use of offering a quick, low-ball settlement to entice desperate plaintiffs into settling for a fraction of what they might receive by waiting.
Lawsuit loans may offer a solution by giving you access to the cash you need to pay medical bills, make mortgage payments and other handle your living expenses. It prevents you from rushing to settle your lawsuit because of financial pressure. As good as that might sound to you, lawsuit cash advances may come with a very high price tag, so a look at the pros and cons of pre-settlement funding, as lawsuit loans are also called, may help you to make a decision based on careful analysis of the facts rather than reacting merely to financial pressures.
What is a lawsuit loan?
Well, it’s not exactly a loan. Technically, lawsuit loans are called third-party litigation funding.
Regardless of its name, the concept behind pre-settlement lawsuit loans is relatively simple. You apply to one of the many settlement funding companies that advertise their services by filling out an application asking for information about your lawsuit and the name and contact information of the lawyer handling it for you.
A credit check and information about your personal finances are not part of the application process because lawsuit loan companies do not care about your credit score, your work history or whether you pay your bills on time. The decision of whether to approve a cash advance is based exclusively on the strength and merits of your lawsuit and how much a lawsuit funding company believes you will receive either through a negotiated settlement or an award by a court or panel of jurors after a trial.
Your ability to personally repay the cash advance is not a factor in the underwriting process because the agreement you make with the company making it is that nothing is due in terms of repayment until you win the lawsuit. When you do, the lawsuit cash advance along with fees and interest or funding fee is paid directly from the settlement proceeds to the lawsuit funding company.
The business of lawsuit cash advances
According to at least one source, plaintiffs in need of cash while their lawsuits are pending in court have taken more than $100 million a year in lawsuit settlement loans. The industry is largely made up of private investors, hedge funds, banks and other types of financial institutions. The lenders are willing to take a risk in exchange for making a sizable return on their investment by giving money to plaintiffs in personal injury cases and other types of lawsuits based solely on their evaluation of the merits of a lawsuit without any recourse against a plaintiff who does not win.
This type of funding option for plaintiffs is remarkably free of government regulation or oversight. As of this moment, only a few states have rules for lawsuit funding conducted in their state, and the federal government has yet to enact legislation governing the industry. Plaintiffs need to weigh the pros and cons of accepting lawsuit settlement funds when they find their income to be insufficient to pay bills and their bank account balances running low.
Advantages of lawsuit loans
It takes time for a lawsuit to make its way through the courts. When you have been injured through the negligence of a distracted motorist or a defective consumer product, negotiations may not bring immediate results. It could be the insurance company for the negligent party refusing to make an offer to settle for what your lawyer believes is a fair and just amount, or the delay could be caused by the seriousness of your medical condition making it difficult for your lawyer to determine whether a disability may affect your future earning capacity.
Regardless of its cause, bringing a personal injury lawsuit, an employment claim for wrongful termination or a civil rights claim to a conclusion takes a great deal of hard work by your attorney and time. Waiting may bring a better outcome for you, but it can be a financial hardship without getting help.
Borrowing money from relatives or from a bank requires a commitment from you to repay it, which is something that your current financial situation probably does not allow you to do. The following are some of the advantages that may be offered by lawsuit funding loans:
- No repayment until settlement of your lawsuit: Pre-settlement funding provides a no recourse cash advance, which means the loan funding company cannot look to you for repayment of the money. A lawsuit loan with terms that it is paid only from settlement money when the lawsuit concludes in your favor protects you from personal liability and relieves you of the pressure of having a debt to worry about.
- A lawsuit loan gives your lawyer time to maximize the money you receive: Instead of caving in to financial pressures and accepting less than the full value of your claim for damages, a cash advance gives you time to wait until the insurance company comes up with a better offer.
- Quick access to a cash advance: Lawsuit loan companies advertise one of the benefits of their service as the quick turnaround time between submitting your application and receiving the money. After the company contacts your attorney and gets the information it needs to evaluate your lawsuit, funds can be directly deposited to your bank account immediately after approval of the lawsuit funding. Other options for funding include Western Union or a check sent overnight via FedEx.
An important thing to keep in mind about lawsuit funding is that as good as they may appear to be when you only look at their advantages, you need to also consider the cost and other factors that may persuade you that the disadvantages outweigh the advantages discussed here.
Disadvantages of lawsuit loans
Not having enough money to pay living expenses can be a strong motivation for accepting an advance against the settlement money you anticipate receiving when you win your lawsuit. Before making the decision to submit an application with one of the many settlement funding companies, consider the following disadvantages of lawsuit loans:
- Lawsuit funding can be expensive: Getting money you need right now instead of waiting for a judgment or settlement in your lawsuit can be extremely helpful. However, remember that the lawsuit funding company is in business to make a profit from its investment in your lawsuit. The legal funding company may not be looking for monthly payments as would a bank or a relative you borrowed money from, but it charges interest from when the advance is made until it is paid from the judgment or settlement of your lawsuit.
- Your case may not qualify for a lawsuit loan: Not all cases qualify for pre-settlement funding. The lawsuit must be one that will result in a monetary settlement or judgment. A lawsuit asking for an injunction or other non monetary relief would not qualify for lawsuit funding. Another point to remember is that settlement funding companies only approve loans in cases they decide the plaintiff has a high likelihood of successfully recovering settlement money or a judgment. They will not take a risk on a weak case or one they do not believe you can win.
- Lack of government regulation: You generally cannot rely on government oversight to protect you from unscrupulous lenders intent on taking advantage of you. You need to shop around and compare fees, interest rates and terms offered by various settlement funding companies before choosing a specific lender.
Lawsuit loans are regulated in only a few states, including:
Arkansas – funding is treated as a loan with an interest rate cap
Colorado – lawsuit funding is considered a loan with an interest rate cap for amounts under $75,000
Illinois – pre-settlement loans are treated as loans with an interest rate cap
Indiana – regulation specific to legal funding with an interest rate cap
Maryland – lawsuit cash advances are loans with an interest rate cap
Nebraska – regulation specific to consumer lawsuit funding with no rate cap
Nevada – regulation specific to consumer lawsuit settlement funding with a rate cap
North Carolina – transactions are considered loans with an interest rate cap for amounts under $25,000.
Oklahoma – regulation specific to consumer litigation funding with no rate cap
South Carolina – treated as loans with an interest rate cap for amounts under $90,000 or $110,000
West Virginia – legal funding is considered a loan and the state imposes an interest rate cap
Remember that in most states, there is no regulation. Companies are generally free to set interest rates as high as the market will bear. Some lawsuit loan companies charge as much as 8.99% compounded monthly. Even before fees that comes out to 180% in a year!
Check out our article on the cost of lawsuit loans to learn more. Take your time and weigh the pros and cons to determine whether a lawsuit cash advance works for you. Discuss it with your lawyer who may have experience with them and can offer advice and guidance. Above all else, shop around and compare rates and terms just as you would when shopping for insurance.
What you need to know before deciding on a lawsuit funding company
Contacting different companies and comparing the terms, fees, and interest rates they offer gives you the information needed to decide whether the cost and other factors make pre-settlement funding worthwhile.
Before applying with any company, check out our guide about how to shop for a lawsuit settlement loan.
Some of the information to ask about includes:
- The interest rate and whether the company uses simple or compound interest. Compound interest is more expensive because you pay interest on the interest. If it is compound interest, ask them to tell you whether it compounds daily, weekly, monthly or at another interval.
- Ask for a list of all applicable fees, other than interest, charged for the money, including upfront fees.
- Ask them to confirm in writing the terms for repayment of the cash advance and make certain you owe nothing should the lawsuit not end in your favor.
- Make certain that the settlement money or judgment will be the only source for repayment of the money advanced to you. In other words, you should not be responsible for paying anything in the event the settlement or judgment is not enough to pay what you owe the pre-settlement funding company.
If a company refuses to disclose any of this information to you or seems evasive or hesitant, you should it off your list of companies under consideration.
Shop around, gather the company information and get your lawyer’s opinion. Do not rush into making a decision. Consider your options and make a decision only when you are satisfied that the advantages outweigh the disadvantages of accepting a lawsuit loan.