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 like one. It is actually considered a non-recourse cash advance. This means that, if the plaintiff loses the case, or if there is no settlement, the “lender” is not entitled to any repayment. Therefore, they are not loans in the legal sense. As they are not loans, this allows financers to get around certain usury laws (laws against excessive interest rates on loans).
What Are the Dangers Involved in Accepting Pre-Settlement Funding?
Since pre-settlement lawsuit financing is very risky for lenders as the lender gets no money if the plaintiff loses, the fees lenders collect are usually quite high, sometimes up to 15%. This means that the company will collect the fronted money along with 15% of the settlement money. This entire amount will be deducted from your settlement money. As such, it is not uncommon for plaintiffs to be left with only a small portion of the original settlement.
In order to avoid being classified as a loan, pre-settlement lawsuit arrangements must be carefully constructed. Specifically, these arrangements must be in some way contingent (i.e. repayment 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.
Should I Consider Pre-Settlement Funding?
Pre-settlement lawsuit funding should usually be considered as a last resort, when a plaintiff cannot cover living and other expenses 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. So, even if an attorney waives his or her fee, the attorney might not be able to give financial help to a client, otherwise he or she risks violating ethics rules, even if the client needs money for living expenses.
So if you wish to file a personal injury lawsuit that you are likely to win, but do not have enough money to cover expenses, pre-settlement funding might be an option.