Pre-settlement lawsuit funding is a cash advance given to an injured party to fund a lawsuit, with the understanding that a portion of the judgment or settlement will be used to repay the under when the lawsuit has come to a conclusion.
While pre-settlement lawsuit funding appears to be a loan, it is, in fact, not a loan. It is actually called a “non-recourse cash advance” in legal terminology. If the injured party who filed the lawsuit loses the case or there is no settlement, the funder is not entitled to any repayment.
So, technically, pre-settlement funding arrangements are not loans in the legal sense. Because they are not loans, the funders of pre-settlement cash advances are able to get around certain usury laws. These laws prohibit charging excessively high-interest on loans.
Personal injury law involves a variety of different kinds of cases. Negligence or intentional torts can be grounds for a personal injury lawsuit. It is important to know which ones can get pre-settlement legal funding. Examples of the type of personal injury lawsuits for which pre-settlement funding might be available are as follows:
What Are the Dangers Involved in Accepting Pre-settlement Funding?
Since pre-settlement lawsuit financing is very risky for the funders as they get no money if the victim loses their case, the fees that these funders collect are usually quite high. Interest rates can reach as much as 15%.
This means that the funder may collect the money it fronted along with 15% interest that accrues for as long as the advance is not paid. This interest that accrues must come out of any settlement money or money paid on a judgment that the victim recovers.
It is important to keep in mind that a lawsuit can take years to reach a conclusion. So, depending on the pre-settlement funding agreement, interest may add up to the amount fronted for a period of years.
Again, this entire amount would be deducted from the money the victim recovers, either in settlement or money paid as a judgment awarded by the court. As such, it is not uncommon for a victim to be left with only a small portion of the amount of money they recover, either as a settlement or otherwise.
In order to avoid being classified as a loan, pre-settlement lawsuit funding arrangements must be carefully constructed. Specifically, these arrangements must be in some way contingent. That is, repayment of the amount fronted must be conditioned on some event that is not certain to occur. Otherwise, these arrangements would just be high-interest loans, which may violate a state’s usury laws.
Generally speaking, making the return of the money fronted contingent on the person who received the money winning their lawsuit is considered to be sufficiently contingent to satisfy the requirements of the law.
However, other arrangements are also possible. There is recourse funding, which requires repayment regardless of the outcome of the fund recipient’s case. Whether the recipient of the fronted money wins or loses, they must repay the person who advanced them the funds. This type of funding may be suitable for a person who is fully confident that they will prevail in their lawsuit or who has the means to repay the funds regardless of the outcome of their lawsuit.
Pre-settlement funding is not available in all states. Certain types of arrangements are legally prohibited in the following states:
- Arizona;
- Arkansas;
- Colorado;
- Illinois;
- Indiana;
- Maryland;
- Minnesota;
- Nevada;
- South Carolina;
- Tennessee;
- West Virginia.
How Do I Qualify for Pre-settlement Funding?
While a person who seeks pre-settlement funding would have to qualify, their credit score is generally not an important factor in the process. A person and their lawsuit are going to be thoroughly analyzed by a potential funder. The funding company assesses the strength of the victim’s case and the likelihood that they will win. The funder would also look at the amount of money the victim is likely to recover, as well as other factors.
Funding companies may also consider the victim’s financial situation, who their lawyer is, and the victim’s overall credibility. Of course, the funder is interested in reducing their risk of non-payment to a minimum and making sure that the case is very likely to succeed.
The funder also wants to get an accurate read on the amount of money the victim is likely to recover so that it is probable that any amount recovered would be sufficient to repay the funder in full for the amount they advanced and their interest fee.
Again, a person usually does not need a good credit score to qualify for pre-settlement funding. This is because pre-settlement advances are not loans, and recovery of the amount advanced depends entirely on the victim’s lawsuit, not on the creditworthiness of the victim.
What Role Would the Attorney Play in the Arrangement?
A person does not need the permission of their attorney to get pre-settlement funding, and their attorney does not have the authority to prevent a client from getting this type of advance.
However, a victim may well want to consult with their attorney before they make such a move. An attorney may well offer some valuable guidance and alert their client to the potential pitfalls of doing it.
In addition, a person’s attorney may be able to point them in the direction of other sources of funds that they can access that might be less expensive in the long run than pre-settlement funding. If a victim is struggling with expenses because of their disability, there may be other ways to access financial assistance, such as a home equity loan.
Additionally, the settlement funding company would, in all likelihood, contact the victim’s attorney before approving the advance, so a victim’s attorney may know that they are seeking pre-settlement funding whether or not the victim discusses it with them.
There are two reasons for this. Firstly, the funder’s assessment of a case is going to depend in part on its assessment of the reputation of the lawyer who represents the victim and whether they have a proven track record of success in cases of the type the victim has.
Secondly, it is common in personal injury lawsuits for the victim’s lawyer to be paid a percentage of the amount of money recovered for their client in the lawsuit. This type of contingency fee agreement is standard in personal injury lawsuits.
In fact, sometimes lawyers themselves advance money to fund the expenses of pursuing the case, and their fee agreement provides for the recovery of any money advanced.
So, someone who is thinking about a pre-funding settlement advance would want to know how much of any money received in the lawsuit has to go to the victim’s lawyer. This is because these funds would not be available for recovery by the pre-settlement funder, or they would have to fight the lawyer to get it.
Should I Consider Pre-settlement Funding?
Pre-settlement lawsuit funding should usually be considered as a last resort when a victim cannot cover living and other expenses through any other means during a lawsuit. While there are some consequences, pre-settlement funding can be helpful in certain situations.
Attorneys are generally not allowed to loan money to their clients because if an attorney becomes a creditor to a client, there is serious potential for conflicts of interest.
Do I Need the Help of a Lawyer for My Pre-settlement Funding Issue?
If you are involved in a personal injury lawsuit that you are likely to win but do not have enough money to cover expenses, you want to consult a personal injury lawyer. LegalMatch.com can connect you to a lawyer who can guide you in considering a pre-settlement funding opportunity.
Or, you may have obtained pre-settlement funding and now have a conflict with the funder or your lawyer regarding the distribution of money recovered in your lawsuit. Again, a personal injury lawyer can help you sort out a resolution of your dispute and protect your interests.
