Here’s What You Cannot Use Pre-Settlement Funding For

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What not to use pre-settlement funding for

One of the unfortunate realities in today’s court systems, no matter which state you are in and whether you are in state or federal court, is that legal cases typically take years to resolve. This backlog has only grown worse over the past several years, as most states and federal courts were closed for long stretches of time due to Covid-19. 

While many jurisdictions were able to keep cases moving on a day-to-day basis through the use of Zoom or similar remote technology, jury trials, which are unfortunately necessary to resolve many of the most difficult cases, were not occurring for months on end. As a result, the system is simply backlogged almost to the point where it can seem ready to collapse. This, no doubt, has negatively impacted you if you have a pending case. 

If you are wondering what you cannot use pre-settlement legal funding (lawsuit funding) on, we have answers for you. We’ll explain restrictions on what settlement advances cannot be used on, when you can be taxed on them, and decide whether taking one out is worth it.

Are there restrictions on how I can spend pre-settlement funds?

Yes, in fact, there are minimal restrictions on how you can spend your pre-settlement funds. You are not allowed to use the funds on legal-case-related expenses, business-related investments, or illegal activities.

Nonetheless, pre-settlement legal funding may be used for just about any expense that results from your accident lawsuit, such as bills or other incurred urgent costs.

1) You cannot use pre-settlement funding to finance your ongoing litigation.

Money from pre-settlement legal funding can typically be used for any purpose except for paying fees and costs related to your pending lawsuit. 

For example, if you received funding based on your need for money to pay your rent and keep the lights on at home, and your attorney asked you to cover the expenses associated with retaining an expert for the upcoming trial in your case with the money you received, you would not be able to use that money for this purpose. 

The same would apply to the costs associated with filing fees for your lawsuit, paying the costs of deposition transcripts, or other costs associated with prosecuting your pending case.  

2) You cannot use pre-settlement funding for recreational activities or criminal matters.

Pre-settlement legal funding is probably not right for you if you have sufficient funds to tide you over for the period during which your lawsuit is pending and when it finally resolves or if you have access to funding that would allow you to tide yourself over during that period. As repayment for pre-settlement funding, you are giving away your right to a portion of the proceeds from your lawsuit, including accruing interest rates, and it normally makes little to no sense to give away these rights in order to just spend it on recreational or, even worse, on illegal materials.

Likewise, pre-settlement legal funding companies do not want to be liable for a borrower’s irresponsible financial actions. In this case, legitimate funding companies like Baker Street Funding have a code of ethics and forbid the use of pre-settlement cash for recreational or illegal means. Also, if your attorney knows this, they won’t consent to the loan since the cash you request is not to meet basic needs.

3) You cannot use pre-settlement funding to make money.

Using legal funding entirely unrelated to dealing with the aftermath of personal injuries that you suffered and profiting from it instead is not wise. For instance, if you use settlement funding to make investments. 

The rationale behind this is relatively simple: if you have the resources that you need to pay your ongoing living expenses and you elect to use the proceeds from pre-settlement legal funding solely for the purpose of making a profit off an investment, then this is completely unrelated to the purpose for which pre-settlement financing is ultimately designed for; therefore you will be taxed.

Getting taxed on pre-settlement funding.

Another thing to keep in mind when you are considering whether to apply for settlement funding is taxes. Settlements in personal injury and many other types of cases are not taxed. 

Accordingly, pre-settlement legal funding typically is not taxed because you are giving up the rights to be paid when your case resolves in order to obtain money to tide you over during the period during which your case is in active litigation before you either settle it with the other side or take it to trial. 

More specifically, if you truly are experiencing a cash crunch and use the proceeds from legal funding to pay your bills and living expenses, you usually will not owe taxes on any pre-settlement funds you obtain.

Deciding whether to use pre-settlement funding.

If you were injured in a motor vehicle accident, for instance, and sued the driver that caused the accident, you may be waiting years for a trial date or any sort of meaningful settlement activity from the insurer. Regardless of how good your case is, the waiting period may be excruciating, particularly if you are financially struggling during that time. 

Bills may be piling up, you may be getting extensive medical treatment that requires you to either miss long stretches of work or stop working altogether, and you may feel like there is nowhere to turn. 

If you are a personal injury plaintiff, this is a time when you may consider obtaining legal funding. Pre-settlement funds can often help you meet your financial obligations during the time of your lawsuit. 

It can prevent a defendant or insurer from using your lack of financial resources against you in settlement negotiations and ensuring that you can recover the maximum amount possible from your pending case.

The takeaway.

When an accident emergency occurs, it’s important to focus on the healthy outcome of your health and legal case. It’s no secret that the costs arising from a personal injury case can be sky-high. However, if you are short of cash, lawsuit funding may be the right solution to alleviate your short-term financial needs. It will help you to hold out for the maximum value of the case rather than some lesser amount that the defendant’s insurer is trying to get you to accept in an effort to save itself a few bucks.  

On the other hand, if you are able to continue working and support yourself despite the circumstances that required you to file a lawsuit in the first place or otherwise do not need cash while your case is pending, then giving the right to a piece of your settlement or recovery to a lender may not be necessary for you. 

Curious to know if pre-settlement legal funding is the right option for you? See what Baker Street Funding has to offer and get pre-qualified in as little as 5 minutes.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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