When it comes to taking on a powerful insurance company in court, personal injury victims often face an uphill battle. Insurance companies have the financial resources required to hire the best attorneys in the nation and pay for expensive legal services. This can be especially difficult for plaintiffs who may need money to pay for everyday needs while they await a long and delayed settlement.
On the brighter side, pre-settlement legal funding is a way for plaintiffs to obtain financial support while they are still going through what can be a lengthy and uncertain process, without having to provide credit or income statements or put up additional collateral. These funds provide you with the necessary capital to cover your living expenses, and pay medical bills, so you can remain in the fight for justice and have a better chance of ultimately receiving a reasonable settlement.
However, jurisdictions regulating pre-settlement funding rates can ultimately hurt you while you are fighting a giant insurance company. The reason for this is that funding providers may not provide non-recourse funding for future settlements in states where the interest rates are regulated like a traditional bank loan.
Here we will cover:
- What is pre-settlement funding?
- What are the issues with regulating pre-settlement funding rates in a similar way to bank loans?
- What is the solution as far as regulating the interest rates in legal funding?
What is pre-settlement funding?
Pre-settlement funding, also known as litigation finance or lawsuit funding, is a type of advance that gives plaintiffs the money they need while awaiting a settlement or judgment from their case. In exchange for a percentage of the principal you receive from your future settlement, you obtain non-recourse funding that is not repaid if the case is lost. Having access to these funds gives claimants an advantage in obtaining a fair settlement, particularly those who are unable to work due to their injuries. It allows you to continue your fight with the necessary resources to take care of yourself and remain financially stable throughout the entire ordeal.
What are the issues with regulating pre-settlement funding rates in a similar way to bank loans?
To understand why regulating pre-settlement funding rates similar to what a bank’s interest rate regulation is a problem, first, you need to understand how pre-settlement funding works.
States where pre-settlement funding rates are regulated
In states where pre-settlement funding rates are not regulated, lenders are able to charge higher interest rates to offset the risk they take on by providing non-recourse funding for pending legal cases. Because the funding is not repaid if the case is lost, lenders are essentially gambling on the outcome of the claim. If the case is successful, the funding provider will receive their money back from your settlement as repayment, along with interest and fees. Otherwise, the legal funding company receives nothing.
States where pre-settlement funding rates are regulated
In states where pre-settlement legal funding rates are regulated, funding providers are not able to charge high enough interest rates to offset the risk they take on with a pending lawsuit. This makes it less profitable for funders to provide non-recourse legal funding, which means that they may not be willing to do so at all. Withdrawing from providing legal funding can be problematic for plaintiffs who have strong cases enough to win but are unable to pay their bills and cover their expenses while awaiting a settlement.
The irony is that the very regulations that are meant to protect consumers may ultimately hurt them in the long run. While it’s important to ensure that pre-settlement funding legal companies are not taking advantage of vulnerable plaintiffs by charging exorbitant interest rates, it’s also important to recognize the value that pre-settlement funding provides. Without it, many plaintiffs would be unable to fight for justice in court.
What is the solution as far as regulating the interest rates in legal funding?
The solution is not to do away with pre-settlement legal funding altogether but rather to find a way to regulate it without stifling it.
Let’s take a look at the three possible solutions to regulating pre-settlement funding rates:
One possible solution is to create a tiered system of regulation, where all funding companies are able to charge higher interest rates for riskier cases and lower interest rates for less risky cases. This would allow lenders to offset their risk while still providing non-recourse funding to plaintiffs who need it. This can be done by ensuring that pre-settlement funding companies maintain legal funding rates that are never lower than 36% per year and never higher than 41% APR in order to continue providing their services. This, in return, would allow providers to remain operational while ensuring that consumer financial interests are protected.
For example, the upper limit of 42% APR on legal funding would be generally accepted as a maximum rate for consumer protection, allowing states to prevent loan sharking and other predatory practices. This cap helps to ensure that any consumer who requires pre-settlement funding can access it without having to pay exorbitant fees or interest rates.
Another possible solution is to establish a cap on the amount of interest that lenders are able to charge but also to provide incentives for lenders who are willing to provide non-recourse funding in states with regulated rates. For example, capping the rate on pre-settlement funding in the second or third year of the loan to help protect consumers from paying exorbitant costs if the lawsuit takes longer than anticipated to resolve.
Ultimately, a rate cap would also encourage funding companies to continue to provide pre-settlement funding in states with regulated rates while also protecting plaintiffs from predatory lending practices.
The takeaway
If you are fighting a giant insurance company during a personal injury lawsuit, you most likely are finding yourself at a disadvantage. Insurance companies have deep pockets, teams of lawyers, and are well-versed in the legal system. Plaintiffs like you, on the other hand, may struggle to make ends meet while awaiting a long and brutal settlement.
Nonetheless, if state officials strike a balance between protecting plaintiffs from predatory lending practices and ensuring that they have access to the funds they need to fight for justice in court, pre-settlement funding can be a valuable tool for plaintiffs. It would be a shame if well-meaning regulations ended up hurting the very people they are meant to protect.
If you are interested in getting funding for your lawsuit, Baker Street Funding offers pre-settlement funding that caps interest rates in the second or third year of the loan. Our caps provide consumers with financial assurance in the event that their case takes longer to settle than expected.
Apply for a lawsuit loan and receive protection from mounting costs with our capped rates. Get started today.
