Balancing Pre-Settlement Funding: Regulation vs. Justice

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Regulating pre settlement funding rates

When engaged in a personal injury lawsuit against a powerful insurance company, you’re likely to face financial strain. These companies have significant resources, including the best lawyers, and are knowledgeable about the legal process. In contrast, you, as the plaintiff, may need money to pay for everyday needs while waiting for a difficult and delayed settlement

On the positive side, pre-settlement legal funding helps personal injury victims in lawsuits get financial support, without having to provide credit or income statements or put up additional collateral. This funding can help cover living expenses and medical bills to help you keep fighting for justice and have a better chance of getting a fair 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 interest rates are regulated like a traditional bank loan.

Here we will cover:

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. If you’re unable to work due to your injuries and your lawsuit is strong enough to win, you might be able to get approved for pre-settlement funding. 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 funds during litigation allows you to continue your fight with the necessary resources to take care of yourself and remain financially stable, so you don’t have to settle for less than you deserve.

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. 

In state-unregulated pre-settlement funding

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 future settlements. Because the funding is not repaid if you don’t win, loan providers are gambling on the outcome of the claim.

This is the reason why legal funding companies mandate attorney representation and only provide funding for cases that are strong and have merit. Despite this, a large number of funded claims still result in losses.

In state-regulated pre-settlement funding

In states with regulated pre-settlement legal funding rates, funding providers are limited in their ability to charge sufficiently high interest rates to compensate for the risk involved in a pending lawsuit. These laws make it less profitable for lenders to provide non-recourse legal funding, which means that they may not be willing to do so at all.

The irony is that the very regulations that are meant to protect you may ultimately hurt you in the long run

States that do not provide financial assistance for litigation can pose challenges for injured plaintiffs with strong negligence claims, as they may struggle to afford their bills and expenses. As a result, they may be forced to settle for lower amounts in order to meet their financial obligations.

While it’s important to make sure that settlement funding companies are not taking advantage of vulnerable plaintiffs, it’s also important to recognize the value that this type of funding provides. If lawsuit victims who are facing financial difficulties do not have access to legal funding, they will not be able to receive fair compensation for their pain and suffering or any compensation at all.

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 lawsuit 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 model could allow them to decrease their possible losses while still providing non-recourse financing to plaintiffs in need. This is achieved by allowing pre-settlement funding firms to maintain a legal funding rate between 36% and 42% APR, which in turn, allows them to sustain their services.

For instance, the upper limit of 42% APR on litigation funding would be generally accepted as a maximum rate for consumer protection, allowing states to prevent loan sharking and other predatory practices.

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. 

The takeaway

If you are fighting an insurance company during a personal injury lawsuit, you most likely are finding yourself at a financial 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 people like you. 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.

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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