4 Pre-Settlement Funding Misconceptions Debunked

Reading Time: 4 minutes
Legal funding misconceptions

Today’s legal funding industry is a growing market of non-recourse lending that provides financing to plaintiffs and attorneys engaged in active litigation for damages and compensation. Although pre-settlement funding still lacks statutory regulation and backing in most states, the industry in the U.S. is a lucrative investment spot by giants in the national financial sector.

Private equity funds and hedge funds have recognized the pre-settlement funding space as a gap that can profitably be filled by introducing more financing entities to positively entertain the increasing number of plaintiffs in need of financial relief and law firms seeking fee financing.

The culture of obtaining funding for legal disputes is more common in the U.K. and Australia than in the United States, where it has just caught pace in the past 20 years. More lenders sponsoring legal battles for plaintiffs and lawyers results in a greater competitive environment, ultimately benefiting borrowers looking for justice against giant corporations.

Despite the increasing foothold grabbed by the legal funding industry, there are severe misconceptions among consumers and the general public regarding the nature and procedure of obtaining a pre-settlement cash advance.

If you are one of these potential consumers, you might be asking, how do I obtain a loan from a reliable pre-settlement legal funding company? Why should I go for an unfamiliar option when I can obtain bank loans too? To clear out many misconceptions from people’s minds, we are addressing the most common myths attached to pre-settlement funding programs. 

Misconception #1: pre-settlement funding is like a traditional bank loan

Although the apparent design of pre-settlement funding programs makes them look identical to a conventional loan, obtaining legal financing is not similar to traditional borrowing. One of the striking differences between loans and legal funding is their repayment arrangement. Traditional loans are recourse based, while legal funding is non-recourse.

Obtaining non-recourse funding to finance litigation expenses for corporate clients and attorneys or to put food on a personal injury plaintiff’s table would mean that the amount you borrow would eventually have to be paid back, no matter what the outcome of your litigation is.

Financial hardships that already exist are prone to double up if you fail to obtain a favorable order or settlement deal despite obtaining a loan for urgent expenses. In contrast, this is not the case in legal funding. The company where you obtain your pre-settlement funding cash will wait for your case to conclude either in an award of damages, compensation, or settlement and will take its fair share of the amount it had lent you.

If, for whatever reason, out of your control, you fail to receive compensation, you do not have to worry about repayment to the lawsuit lender. You do not owe anything in the face of an adverse outcome.

Moreover, unlike conventional financing, lawsuit funding does not have unnecessary strings attached to it. They are easy to obtain, and since they do not count as actual “debts”, your credit report or ratings and your income are not affected or checked in any manner whatsoever.

Misconception #2: Legal funding has no flexible interest rates

Pre-settlement funding programs provide ample room for plaintiffs and lawyers to resolve their short-term cash needs in exchange for a nominal fee/rates for their financial services after the consumer receives compensation.

Over and above, pre-settlement funding programs do not comprise strict interest rates, timely payment deadlines, or stringent plans. Lenders have realized that the legal funding business relies on relatively safe investments rather than providing loans in the traditional manner. Therefore, they are at greater liberty and more willing to design flexible funding plans for litigants and attorneys than banks do while offering recourse loans.

The fee charged by litigation funding companies vary. Plus, they do not require you to spend the borrowed amount for required purposes.

Misconception #3: Pre-settlement funding is unregulated and extremely dangerous

This is one of the legal financing myths that used to be true. But thanks to the growing popularity of funding providers, you now have more and better options for getting a settlement loan based on your specific circumstances and as per tailored requirements. With such high competitive market also comes competitive rates you are no longer stuck to taking a lawsuit loan with a predatory rate.

Plus, in a handful of instances, state governments have interfered with allegedly making the legal funding fields safe for plaintiffs. But unfortunately, some of these regulations end up hurting cash-strapped victims since funding providers withdraw their services in such jurisdictions due to the high risks of offering non-recourse financing legal claims with rates compared to what banks offer people with great credit. Only certain states have regulated the pre-settlement funding industry through legislation treating it as a loan, but others have placed fair regulations for lenders and consumers.

Ultimately, a jurisdiction that caps rates at less than 35% per year is where most funding providers are no longer funding personal injury cases. As a result, plaintiffs take the lowest settlement offer from the insurance, profiting the insurance company.

Misconception #4: Legal funding companies interfere with cases

When it comes to the cases litigation funding companies handle, attorneys are always concerned about the financial relief sought by their clients and the possible impact of legal financing on their cases.

It is wrongly believed that pre-settlement funding companies tend to interfere in legal cases after providing financing. Pre-settlement funding companies do not make such an intervention into the attorneys’ and clients’ own space and strategy for pursuing a legal battle. It makes absolutely no sense since they can lose millions of dollars of investments in these claims.

In fact, legal funding is found to make attorneys’ practice a lot easier. This is because plaintiffs who are under financial constraints often tend to act more desperately towards their cases than those who are at economic ease. Once a plaintiff has secured financial relief from a lender, attorneys can pursue such cases more focused and dedicatedly, without their clients’ interruptions.

Pre-settlement funding companies, which stand out as a reliable option to alleviate financial concerns during litigation, can now be safely considered.

Bottom line

Newcomers into the pre-settlement funding industry constantly strive to attract as many plaintiffs looking for financing, and a hand full of litigation funders are expected to come up with funding programs for defendants in the near future.

The pre-settlement funding program is not for everyone, but if you qualify, there can be great benefits. The key is not letting misconceptions get in the way of understanding how pre-settlement funding works and asking questions to the lender.

Baker Street Funding knows that all of this can be confusing, so we have created a Resources Center to help you educate yourself before funding your legal claim.

Need financing for your case? Contact Baker Street Funding to learn more about how our services work.

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.

See some of our settlement financing products

Select a legal funding service to get started. 

Attorney Requests

Lawsuit Loans

Litigation Funding

Personal Injury Loans

Settled Case Loans

Surgery Funding

Or just call us at 888.711.3599 to apply.