Settlement funding (also called lawsuit loans) is gaining traction in the United States as it has emerged as an imperative aspect of the legal system. In the US alone, the legal funding industry has recorded astronomical growth, and according to Bloomberg Law estimates, it soared to a $39 billion industry globally in 2019. Despite the industry’s enormous size and growth potential, there is still a lack of understanding about what settlement funding is and how it works.
Here, we will take a look at:
- The origins of settlement funding
- What is settlement funding?
- How does settlement funding work?
- What are the fees and interest rates offered by settlement funding companies?
- Why should I choose settlement funding?
- What types of cases do funding providers invest in?
- Important factors about settlement funding regulations
The origins of settlement funding
In today’s world, the justice system confronts multiple challenges, and personal injury victims with pending claims struggle with the administration of justice in every jurisdiction. Thankfully, settlement funding originated in the mid to late 90s in response to the growing financial needs of plaintiffs involved in litigation who are dealing with settlement delays and lowball insurance offers, specifically those with personal injury lawsuits.
Generally, people who suffer any personal injury, be it physical injury, mental illness, or emotional abuse, find it very difficult to continue with their employment, and in most cases, they are unable to generate income and make ends meet. Generally, lawsuit victims have no cash to fulfill their immediate financial burdens after an incident, such as the medical bills for the treatment of the injuries, the payment of energy bills, groceries, rent, mortgage payments, insurance premiums, and other day-to-day expenses. Overall, these financial problems can be a source of great stress.
As you might guess, lawyers are bound by the ethical code of conduct, and they are not allowed to provide any financial help to their clients to help them in financially stressful situations. So what do you do? Fortunately, legal funding companies have the capital available to provide financing to plaintiffs with pending lawsuits who are in need of financial support to fill in those gaps while pursuing a case until it succeeds.
What is settlement funding?
Settlement funding is a financial service where a legal funding company provides you with cash from your pending lawsuit to cover all necessary expenses. Unlike any type of traditional financing, all non-recourse funding for future settlements is based on the lender’s decision on what the merits of your case are and not your financial standing. That means that your credit score, income, and employment history are not a factor and are not checked.
Moreover, settlement funding companies take a risk when they provide you with cash, as they are entitled to repayment only if your case resolves in your favor and the compensation is received. In other words, when you receive cash funding during the pendency of your lawsuit, in return, you are bound to pay back the amount funded to you plus interest and fees to the lender after the successful conclusion of your case.
However, in case you lose the lawsuit, the funding company will lose its investment, and no repayment is due.
How does settlement funding work?
Settlement funding companies have multiple sources of investment, including private equity firms and private individuals, and in some cases, they may also offer shares to the public. Likewise, this type of funding is structured as an assignment of property rights, in which the property assigned is the potential “future proceeds of a lawsuit”.
Getting settlement funding is fairly easy as long as you fulfill the lender’s prerequisite conditions. Some of these conditions are:
- Having an attorney with a contingency fee arrangement;
- Your attorney has to be willing to provide the requested documents and information about your case;
- A viable claim to attach worth over $50,000;
- A defendant who can pay damages like one who has insurance coverage;
- Be 18 years of age or older.
If these pre-conditions are fulfilled, your application goes through a team of funding specialists who will finish qualifying your pending claim and request your attorney your case information before sending it to underwriting. Underwriters are attorneys who work for the lender and evaluate the risk associated with the lawsuit and the potential advance. For that reason, the most important condition for a successful lawsuit funding application consideration is your attorney’s participation with the lender. Your application gets approved if your lawsuit meets the funding company’s current risk criteria.
After approval, the settlement funding group provides you a non-recourse financing agreement with the condition to repay the money you took out and a specific percentage of that borrowed amount, also known as an interest rate, once you win a settlement or verdict for your case and get paid.
Additionally, the funding time can vary from case to case depending on the lawsuit’s complexity and the attorney’s submission of information to the company. Generally, processing an application can take 12 to 48 hours.
As noted above, legal funding companies undertake huge investment risks, and the interest rate charged is comparatively higher than those of conventional loans.
What are the fees and interest rates offered by settlement funding companies?
All lawsuits are high risks, and no litigation has a guaranteed win. Due to the high risks and non-recourse basis in these funding agreements, lenders charge interest rates that are higher than traditional banks, and you may have to pay a lot more than what you would pay a bank since their credit or income is not checked, no assets are required for the advance. So if you fail to defend your claim and lose the case, you are not obligated to repay the money from any personal assets, and the provider will not be entitled to get any repayment.
A settlement funding fee is a charge that a financing company requires you to pay after you receive compensation from your claim to cover the cost of underwriting and other loan costs. It’s a one-time fee calculated as a percentage of the total amount you borrow, varying from 5% to 15%, with most lenders.
The interest rate costs in settlement funding loans also vary from lender to lender. Generally, lenders would charge anywhere between 2.95% and 4.5% per month on personal injury claims, either compounding or simple.
In contrast, companies like Baker Street Funding charge non-compounding rates starting at 2.95% to 3.4% per month, with an added protection with all charges ending in the third year of the agreement. This non-recourse loan structure makes us one of the funding providers offering the lowest cost pre-settlement funding overall.
Why should I choose settlement funding?
Personal injury victims not only have to deal with financial constraints to cover personal expenses, but they also have to face insurance companies and their team of defense lawyers during a pending case. Physical injuries, no cash flow, and lengthy litigation dry up the motivation to pursue a meritorious claim, and most often, people accept an undervalued settlement offered by the opposite party just because of financial issues. These settlements are not only detrimental to the interest of the claimants but also have negative implications for the administration of justice and can contribute to a trust deficit in the judicial system.
There are absolutely clear benefits to non-recourse funding since companies have come into the picture to resolve this dilemma by offering you access to cash to pay for pressing financial hardships while the lawsuit gets resolved—and without any interference in the case itself.
Settlement funding helps you tackle the pressure from the multi-billion dollar insurance company and pursue your legal matter till the end without worrying about your financial restraints.
Other common reasons to choose a pre-settlement cash advance are:
- 24 – 48 hour time.
- No monthly payments.
- No win, no pay guarantee
- Get additional funding as needed
- No credit or income verification.
What types of cases do funding providers invest in?
There are different types of settlement advance companies, and they all invest in a wide variety of cases. Some of the most commonly funded lawsuits are:
- Automobile cases
- Slip and Falls
- Premises liability
- Catastrophic injuries
- Medical Malpractice
- Wrongful death
- Employment related cases
- Product liability cases
- Qui tam
- Securities and shareholder
Important factors about settlement funding regulations
The settlement funding industry is still unregulated, and there is no federal legislative instrument to regulate these arrangements. The Federal Government and Consumer Financial Protection Bureau (CFPB) have yet to offer guidance. Some states have enacted statutes and mandate the registration of litigation funding companies within their jurisdiction to provide their services to their inhabitants.
Keep in mind that advances provided by settlement funding companies can significantly help meritorious claimants fulfill their financial liabilities in the short run without succumbing to the pressure of insurance companies and settling for a deliberately low estimated settlement. Otherwise, they may not be able to pursue their claims for the actual value.
Still, there are many misconceptions and ambiguities attached to the industry, potentially by the same insurance companies lowballing plaintiffs. Very few companies charge higher than usual rates and provide no caps, and the claimant may be left with a minimal settlement amount. But this is not true for most of the industry. Overall, many settlement funding companies like Baker Street Funding provide competitive rates and caps as the industry grows to keep it growing while helping those in need. Although the rates are higher than traditional loans, higher rates balance off the high risks in cases that get funded but ultimately don’t win.
Ironically, few states have imposed limits on the interest rates to be charged by lenders treating them as traditional loans, eventually pushing away funding companies from financing cases in those states. What these educated and well-informed lawmakers fail to acknowledge is the risks in non-recourse funding investments. Legal funding contracts are structured as “non-recourse debt”, and state usury laws do not apply to these contracts as these laws are enacted to regulate traditional loans in which the borrower is bound to repay the borrowed money under all circumstances. That means that litigation funding is not a conventional loan as it is not paid back if there is no settlement in the future.
All in all, interest rate limits on litigation funding in certain states unfortunately only hurt the plaintiff since lenders are withdrawing their services in those same jurisdictions with those same laws. As a result, these legislations clearly give insurance companies the preference to keep predating on people struggling financially. They do this by offering them lowball settlements while delaying compensation so they can save money by paying less to plaintiffs with legitimate claims.
Despite this, as the settlement funding industry grows, there is a greater probability that meaningful regulations may be enacted to regulate it within some time. As long as these regulations work for lenders considering the high risks in their investments on future settlements that banks fail to provide, then plaintiffs struggling to cover their living expenses while fighting multi-billion dollar insurance companies may be able to get help and justice in the end.
While there is a lack of regulation and some funding providers will offer great rates, it is important to consider the terms of the agreement and the advantages and disadvantages behind a lawsuit cash advance. By doing that, you can decide about entering into an arrangement with a lender wisely. Most importantly, your lawyer should have a better understanding of funding contracts so that they can assist you in the decision-making process. Attorneys can clearly communicate the interest rate set by the funder to avoid future misconceptions.
For some of life’s curveballs, such as a personal injury lawsuit — the occasional need for a settlement funding advance might arise. With no risk and competitive non-compounding rates, a Baker Street Funding cash advance may be the right option for your financial emergencies during your pending case.
Settlement funding from Baker Street Funding provides you with money while your case is pending to resolve your short-term cash flow problems and help you fulfill your financial obligations until the lawsuit is successfully concluded. That means you have to repay only if your case is successful in the end.
If you need financial assistance after an accident and have exhausted all other possible sources of funding, a settlement loan from Baker Street Funding can be of great help. Get pre-settlement funding by applying today.