Pre-settlement funding often raises the question of regulation. The answer is twofold. At the federal level, this type of funding is not regulated. However, certain states have implemented their own regulations in this regard.
Legal funding offers a financial solution for plaintiffs waiting for the outcome of their case. This allows you to access funds before your settlement, making it easier to manage expenses like rent, mortgage, or medical bills until your case resolves.
The Non-Recourse Nature and Variations in Settlement Funding
Pre-settlement funding, also known as a lawsuit loan, or a litigation advance, by it’s very nature, is a “non-recourse” financing transaction. This means that plaintiffs who do not win their cases are not obligated to repay the funds. It’s a helpful option for those who need financial support during legal proceedings.
The non-recourse feature is a fundamental aspect of pre-settlement funding and is typically uniform throughout the sector, regardless of the state. It is not a conventional bank loan or “legal lending”. In other words, the funding company invests in the projected settlement or lawsuit award of your filed personal injury case.
Litigation funding involves a high level of risk for the funders because lawsuits are already high risk to begin with. This risk is often reflected in higher costs compared to traditional loans. However, interest rates, fees, and contract terms vary across funding companies. Some provide better costs than others.
Before you start thinking about a lawsuit advance, it’s a good idea to do some thorough research. That way, you can choose the best pre-settlement advance option and make sure you are getting a fair deal.
Pre-Settlement Legal Funding: An Investment, Not a Loan
Traditional bank loans are typically determined by the borrower’s ability to repay the loan in time. This involves considering factors such as credit scores, income, and collateral. In contrast, legal funding is based on the potential settlement or judgment in a legal case. Since there’s no guarantee that a case will win and recover compensation, banks don’t see the possible settlement winnings as collateral.
It’s in the non-recourse nature of this financial service that pre-settlement funding is really different from traditional loans. They’re in fact investments. That’s because the funding company is “investing” in the potential settlement of your litigation. If your case is unsuccessful, the company’s investment will be lost, making it a highly risky venture. This is in comparison to venture capital investments, the investor assumes substantial risk in exchange for the possibility of a large reward.
Examining the Need for Balanced Regulations of Lawsuit Loans
While it’s understandable to be concerned about high-interest rates associated with pre-settlement legal funding, bear in mind that these rates reflect the high risk undertaken by investors in these non-recourse transactions. Imposing rate limits similar to those of “banks” or “legal lending” entities, might cause providers to withdraw their services, reducing the availability of this essential financial help for injured victims involved in a lawsuit, and often predated by insurance companies to settle for less.
Nonetheless, this doesn’t mean that the industry should be without oversight. One potential solution could be to implement a limits on interest rates, for example, no higher than 42% per year, with a time frame cap. If the case takes longer to settle than this “timeframe”, the client wouldn’t be charged additional costs. This approach can help achieve a balance that sustains the viability of these financing products as an investment opportunity while also protecting consumers from excessive charges.
Unveiling the Current State of Pre-Settlement Financing Amidst the Regulatory Talk
Did you know that the regulations surrounding legal funding is like a complex puzzle with missing pieces? Interestingly, while some states, such as West Virginia, has implemented laws to regulate pre-settlement legal funding, many others haven’t. And for good reason.
The regulation in Illinois sets similar rates for litigation funding as those of a personal loan and also limits the amount that can be given to injured victims to $40,000, regardless of their circumstances. In cases that last 2 years, one must consider if $40,000 will be sufficient to support the plaintiff’s needs, medical bills, groceries, rent, childcare, transportation etc. Similarly, some companies are no longer funding lawsuits in the state.
West Virginia’s regulation caps the annual interest rate at 18%. This regulation has led pre-settlement funders to cease financing lawsuits in this jurisdiction. Consequently, injured victims in West Virginia are not receiving financial assistance from their accidents or injuries from any legal funding company.
Consider a woman who is the victim of medical malpractice, for instance. She may be facing mounting medical bills, loss of income, and other hardships. Due to her financial circumstances and the fact that banks do not see potential winnings as collateral, a traditional bank loan may be out of reach. During this difficult period, the availability of pre-settlement lawsuit funding may provide the money she needs to cover medical bills, living costs, and any other urgent expenses.
But what if legal funding was not available in her state? Should she have no other choice but to settle for less? Unfortunately, a good amount of personal injury victims do when funders withdraw their services from strictly regulated states, leaving injured individuals without any means of support during their legal battles.
Ironically, another question arises: if legal funding companies cease funding lawsuits in states that regulate them as loans, who ultimately benefits? The insurance.
Why the Insurance Wins with Strict Legal Funding Regulations
Strict regulation of lawsuit financing primarily favors insurance companies. Here is why. The U.S. insurance industry, estimated to be worth $1.4 trillion, benefits the most from plaintiffs’ inability to access cash during times of hardship. This is because insurance companies typically delay, lowball, or deny settlements.
Lowballing is a stalling tactic used by insurance companies to offer an unreasonably low settlement amount to claimants. This is done in the hope that personal injury victims will be desperate enough to accept the offer due to the lack of financial means to support their basic needs. Unsurprisingly, this reality puts pressure on these victims and encourages them to accept low settlement amounts.
Moving forward, it’s extremely important that we examine this issue closely and advocate for stronger, more effective regulations. The aim should be to protect consumers from over-regulation that will push away settlement funding companies from providing financing and from predatory lenders that can take advantage of them. But most importantly, to protect struggling personal injury plaintiffs from getting preyed upon by insurance companies who pay the least amount possible to protect their bottom line.
As the legal funding industry continues to grow, so too should our efforts to ensure fairness and transparency for both finance companies and consumers. Americans should have the right to much-needed funds during a pending lawsuit and not be left at the mercy of insurance companies looking to minimize their payouts, as this has always been the issue and the case. Lawmakers and regulators should focus on creating regulations that balance the interests of all parties involved.
In the end, it’s about more than just regulation – it’s about justice and providing support to those who need it most.
Need Funds During Your Personal Injury Lawsuit?
At Baker Street Funding, we recognize the importance of striking the perfect harmony between consumer protection and ensuring legal funding is available. Our team of experienced professionals is ready to guide you through the lawsuit funding process and provide you with the support you need to make the right decision. Our interest rates start at 2.95% per month, with a cap in the third year to protect you against exorbitant costs.
Take advantage of our pre-settlement funding offering today. Apply now to secure your funds in 24 hours or less
