If you have a lawsuit pending against someone who injured you in a car crash, you may be under extreme financial pressure. When you need money for household expenses or money to repair your car, pre-settlement funding may be the solution to economic hardship with an immediate cash advance only from the settlement. If you do not win, you do not owe anything to the funding company.
Pre-settlement funding, also called lawsuit funding, lawsuit loans, and several other names, may sound good, but there may be other options. You need to weigh its pros and cons before applying for funding. This article gives you an overview of lawsuit funding and some of its pros and cons for you to consider before committing to it.
What is pre-settlement funding?
When you make a claim against someone for personal injuries, wrongful termination, and other forms of harm, getting the compensation you deserve takes time. While your attorney negotiates to settle your claim, medical bills, household bills, and other expenses strain your finances. Insurance company claim adjusters frequently delay negotiations hoping to force you to take less than you could receive.
Companies offering pre-settlement funding lend money to people with pending lawsuits in return for the right to repayment of the cash advance plus interest on the award when the case settles or ends with a verdict after trial in favor of the claimant. You must consider the advantages and disadvantages of lawsuit funding before moving ahead with an application for financing.
Advantages of pre-settlement loans
At least one study shows that people who may already be struggling to make ends meet benefit the most from a process that gives them immediate access through a cash advance representing a percentage of the settlement or judgment from a pending case. Someone with money in the bank and other assets available to replace income lost while out of work because of an injury has options that may not be available to the average person working paycheck-to-paycheck.
Advantages that could make a lawsuit loan a good choice for you include the following:
- Immediate funds to pay bills: The cash advance from a lawsuit loan is yours to do as you wish. Use the money to pay the rent or mortgage, pay medical bills, repair your car or buy a new one, pay for tuition and other education expenses, or just take the family on vacation.
- Avoid falling prey to insurance company delay tactics: Lawsuit funding lets you access a portion of a future settlement to relieve economic pressure that could force you to take less than the actual value of your claim in return for a quick payout. Insurance companies know this and delay negotiations and the progress of a case to pressure plaintiffs into accepting less. A cash advance lets you give the attorney representing you the time to pressure the insurance company to settle the claim or take it to trial.
- Pre-settlement loans are non-recourse transactions: Funding companies want to know about the lawsuit. They do not ask for employment verification, bank statements, or credit reports because lawsuit funding is a non-recourse transaction. You are not personally liable for its repayment even if you lose the case. The only reimbursement source available to the funding company is a settlement or judgment from the pending lawsuit.
Ask the attorney representing you in the pending lawsuit to review the agreement containing the terms of your funding approval to ensure that it conforms to the interest rate and repayment terms the company promised.
Disadvantages of pre-settlement funding
If you only look at its advantages, a pre-settlement loan may be the right choice to get money while waiting for a lawsuit settlement. Still, you must consider the cons before committing to it or a particular funding company. The following are some of the cons to keep in mind:
- The expense of the cash advance: Pre-settlement loans can be expensive because the lender charges monthly interest on the money you receive for as long as the loan remains unpaid. The longer a trial or settlement takes, the greater the interest owed on the cash advance.
- Some cases do not qualify for legal funding: Companies only fund cases they believe will end in a judgment or settlement favorable to a plaintiff. They look at the strength of the evidence and the likelihood a plaintiff will prevail. As a general rule, settlement companies only fund cases where insurance coverage exists to pay a settlement or verdict.
- You must have an attorney representing you: The attorney for a plaintiff handles the negotiations to settle the case and presents evidence at trial to persuade a jury to award a judgment in your favor. Your attorney is essential to the lawsuit’s success, so funding companies generally insist that you have one handling your case.
- Cash advances are a portion of the settlement value: Pre-settlement funding companies only pay a part of the settlement value of a lawsuit. For example, if the company values your case at $100,000, it may agree to give you 15% or $15,000 as a cash advance. Companies set their policies, so shop for the best terms, including the advance amount.
The lack of federal laws regulating the industry and limited state regulation means you must shop for the best terms, including interest rate, before choosing a company for pre-settlement funding.
Contact several lenders and ask them to disclose their terms, including the interest rate and any other fees you must pay to get a cash advance. A reputable company does not hesitate to reveal the terms and conditions before you complete an application. Apply only to companies that are entirely transparent about their application, underwriting, and funding processes before you choose a company to use.
Once you have information from a few companies, discuss it with your attorney, who can help you sort through it. The attorney handling your lawsuit may have the best information about how long it may take to achieve a settlement, which is helpful when estimating the cost of the loan.
Pre-settlement funding can be beneficial by giving you immediate access to a portion of the settlement value of a pending lawsuit. However, you must weigh the pros and cons before applying for funding and accepting a cash advance.
Jared Stern is an experienced financial professional with six years of experience in the pre-settlement funding industry. After graduating from UC Berkeley with a degree in economics in 2014, Jared began his career in Morgan Stanley’s mergers and acquisitions investment banking division. After working with another pre-settlement funding company for two years, Jared founded Uplift Legal Funding in 2017 to give injured plaintiffs a better choice in lawsuit loans.