Pre-Settlement Lawsuit Funding
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 paid back to the finance company when the suit is over. While pre-settlement lawsuit funding appears to be a loan, it is not treated as such; it actually is a non-recourse cash advance. This means that, if the plaintiff loses the case, or there is no settlement, the “lender” is not entitled to any repayment. Therefore, they are not loans in the legal sense, which allows financers to get around certain usury laws (laws against excessive interest on loans).
Because pre-settlement lawsuit financing is very high-risk, the fees tend to be quite high, sometimes up to 15% (the fronted money, plus 15%, will be deducted from your settlement and paid to the finance company).
In order to avoid being classified as a loan, pre-settlement lawsuit arrangements must be carefully constructed: namely, they must be in some way contingent (repayment must be conditioned on some event that is not certain to occur). Otherwise, they are just high-interest loans, which may run counter to a state’s usury laws.
Pre-settlement lawsuit funding should usually be considered as a last resort, when the plaintiff cannot cover living and other expenses during a lawsuit. It can be valuable, however, because attorneys are generally not allowed to loan money to their clients. So, even if an attorney waives their fee, they cannot give financial help to their clients in any other way, because if an attorney becomes a creditor to a client, there is serious potential for conflicts of interest.
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Last Modified: 04-21-2009 04:50 PM PDT
