When you are the victim of a personal injury, life doesn’t pause. The accumulation of medical bills, rent, groceries, and other daily living expenses can lead to financial strain. That’s besides the physical and emotional toll of your injury.
Although attorneys are available to advocate for their clients in legal matters, lawyers are legally prohibited from providing financial help to their clients. This is when pre-settlement funding companies, also called litigation funding, become relevant. This financial option provides you with assistance in resolving financial difficulties during a civil lawsuit and can help you get a fair legal settlement.
What is settlement funding?
Settlement funding, also known as legal funding or lawsuit loans, is a financial service that provides cash advances to individuals involved in pending legal claims or lawsuits. Personal injury plaintiffs who are experiencing issues with their finances typically use this type of funding. It provides immediate funds to cover daily living costs, medical expenses, car payments, or other financial obligations while the case is ongoing.
One distinguishing feature of settlement funding is its non-recourse nature. The decision to provide legal funding is determined solely by the strength and value of your suit, not by your personal financial standing. Elements such as your credit rating, income level, and job history are irrelevant.
Non-recourse means that the lender only gets repaid a piece of the settlement or judgment if your case is successful. But if you lose, you owe nothing, and you won’t be in debt. This structure is a stark contrast to traditional loans, where repayment is mandatory regardless of whether you can make payments.
The process of settlement funding
The process of obtaining settlement funding involves the following steps:
- First, you apply to a pre-settlement funding company and provide details about your case and your attorney’s contact information.
- The funding company will then need your personal injury case information from your attorney. This information may include the details of the lawsuit, medical treatments, the other party’s insurance, and the estimated settlement value.
- If your attorney is responsive, the lender will then assess the probable settlement amount and the risk associated with your case. That evaluation is to determine the amount of funding you are eligible to receive, and it involves a discussion with your attorney.
- If your application is approved, the lawsuit loan company offers you a non-recourse funding agreement. This agreement outlines the terms of the advance, including the repayment amount and any fees or interest.
- After signing the funding agreement, you can receive the cash within 24 hours. If you win your case, the agreed-upon portion of the settlement goes to the settlement funding company. There is no legal requirement to pay them back if you do not win.
Case Evaluation Criteria
Pre-settlement funding companies evaluate legal cases by considering several factors before approving them for funds. This evaluation process is known as underwriting. It involves the provider assessing the level of risk it is willing to assume when providing the loan.
The criteria to qualify for settlement funding are as follows:
- A legitimate case. You need to have a legitimate claim resulting from incidents like automobile accidents, wrongful imprisonment, workplace accidents, medical malpractice, slip and fall, wrongful death, lawsuits for qui tam, or any other case of a similar nature.
- Liability: This term refers to who is at fault in the case. If the claimant (the person applying for a lawsuit loan) is not at fault, then the chances of getting approved increase.
- The severity of injuries. Your attorney must provide medical records showing the severity of the client’s injuries. More severe injuries have a greater chance of the lawsuit settling for a higher payout. In this case, approval is more likely.
- Insurance coverage. A defendant with substantial coverage or assets increases the possibility of obtaining compensation and, therefore, loan approval.
- Legal representation. Your attorney’s success record, reputation, and willingness to take the case to trial, if necessary, are also part of the criteria. A lawyer with a proven history of successful settlements or verdicts indicates the possibility of a strong case. This increases your odds of getting lawsuit loan approval. However, you cannot receive settlement funding without a lawyer or consent to your loan request.
- Case progress. The legal funding company will also consider how far along the case is. If your case is close to settling, it may improve your odds of loan approval.
- Approximate settlement worth. The higher the anticipated settlement value, the more likely the lender will approve your pre-settlement advance application.
Since no two cases are identical, settlement funding companies might have additional criteria. It’s best to engage directly with potential funders to understand their specific requirements. Remember, pre-settlement funding is not a loan; it’s a cash advance against the possible settlement monies you’ll receive in the long run. If your attorney does not recover compensation, you won’t have to pay anything back.
Fees and interest rates: a necessary trade-off.
Settlement funding, often regarded as a lifeline for those battling long-running lawsuits, undoubtedly comes with higher interest rates compared to conventional loans. This fact may seem discouraging at first glance; however, settlement funding offers many unique benefits that justify its higher rates.
The ‘non-recourse’ nature of lawsuit funding means lenders take on significant risk, and this cannot be understated. It is one of the key reasons the interest rate is typically higher than those offered by conventional lenders. Unlike bank or credit union loans, where the repayment is almost guaranteed to them through collateral or a steady income, pre-settlement loans rely heavily on the outcome of a yet-to-be-decided legal case. And lenders who offer these advances are taking a major gamble on the end result of each case. There is a very real possibility that they may not see a return on their investment, as repayment is contingent upon the plaintiff’s victory.
This ‘no-win, no-pay funding structure’ is unique to lawsuit loans and is not found in traditional lending. Hence, to compensate for the risk of not getting paid back, these companies charge a higher interest rate. These rates can vary significantly from company to company and can also depend on the length of time it takes for a case to settle.
If the case is won, the funding company recovers its costs from the settlement or court award. If the case is lost, the company absorbs the loss.
Comparison with traditional loans.
Pre-settlement funding and traditional loans are both forms of financing that are used for different things. However, the two differ considerably regarding their purpose, repayment terms, risk, and eligibility requirements.
- Purpose. Traditional financing includes buying a house, starting a business, paying for education and more. It is also available as a credit card. On the other hand, settlement loans are for plaintiffs who are undergoing a lawsuit and need cash assistance to cover basic expenses.
- Repayment Terms. With conventional loans, borrowers are required to make regular payments over a predetermined period, irrespective of the outcome of any unrelated legal cases. In contrast, settlement funding doesn’t require repayment until the lawsuit is settled. If the plaintiff wins, the funding provider receives a share of the settlement. If the plaintiff loses, nothing is due to them.
- Risk. Regular loans usually require collateral to secure their loans, and failure to repay can lead to loss of assets. Late or missed payments can affect the borrower’s credit score. This security is why the interest rates from traditional lenders are lower than legal funding, but the borrower is required to repay the loan no matter what. However, settlement funding works as a non-recourse cash advance. That means the funding company can only claim its payment from the settlement money. It also means the plaintiff’s personal assets or credit score are not at risk. This non-recourse nature reduces the risk for you as a borrower, but it also contributes to higher fees and rates compared to traditional lending institutions.
- Eligibility. Traditional bank loans commonly take into account the borrower’s credit history, debt-to-income ratio (DTI), and available resources when making their decisions. Settlement funding companies, however, are only interested in your case’s merits and the estimated payout.
To put it simply, the main difference between pre-settlement funding and traditional loans comes down to risk and repayment obligations. Lawsuit funding can provide immediate financial support for individuals facing lawsuits. Traditional lenders are more appropriate for anticipated expenses like buying a car or house.
Settlement funding advantages.
Settlement funding can offer numerous advantages to individuals who are waiting for their legal settlements to be finalized. With the uncertain nature of legal battles, it can sometimes take months, if not years, for a case to come to a positive resolution. During this time, those involved may experience significant financial distress. It is not uncommon for bills to continue to pile up and struggle to stay afloat. Here, pre-settlement funding makes all the difference.
- Support financially. Settlement funding can prove invaluable for people who’ve suffered life-altering events, such as auto accidents or discrimination and wrongful dismissals from employment positions, or even wrongful incarceration. There are barely any restrictions on how you can use the funds. It helps cover those extremely important costs when you’ve already exhausted every other financial option available.
- Stronger negotiating position. Consider a scenario where an insurance company offers you a quick, low-ball settlement to close your case. With settlement funding, you can reject this offer, knowing that your immediate financial needs are taken care of. Having the money you need allows your attorney to negotiate the true value of your case.
- Quick access to funds. With a settlement advance, individuals often get the quickest way to get cash when facing financial struggles due to a pending lawsuit. While traditional financing requires extensive paperwork and an extensive approval process, settlement loans are approved within 24 hours with minimal paperwork involved. Rapid turnaround times can be a huge help for those who need prompt access to money.
- Non-recourse funding. Simply put, if you lose your case, you don’t have to repay the funding company anything at all. This aspect can provide significant comfort, especially for those already dealing with the stress of a lawsuit.
- No impact on credit score: Lawsuit funding does not require a credit check, and it doesn’t affect your credit score. It’s a good option for those with less-than-perfect credit or those who want to avoid adding more liabilities to their credit report.
- Customized funding: Settlement loan companies generally offer a customized funding solution based on the specifics of your case and your personal financial needs. This personalized approach guarantees that you receive the right amount of funding needed to sustain yourself in the meantime.
Settlement funding disadvantages.
Although a lawsuit funding company can offer you several advantages, you should also be aware of the potential disadvantages.
- High Cost. Settlement funding has higher interest rates than traditional financing options, which can increase the cost of borrowing when you win your case. That’s because these lenders are taking on the risk that a case will not settle and that they will not be able to recoup the money they lent.
- Limited Availability. Lawsuit settlement loan companies may be reluctant to extend funding if the lawsuit is too new or the injuries are not severe. These cash advances are also not available if you are seeking damages from a party with no insurance.
- Restricted to specific jurisdictions. Non-recourse litigation funding is not available in all jurisdictions. If you have a claim in a state where funding companies are not operating because of strict regulations, you may not have access to financial help.
- Regulation restrictions. Very few states have adopted laws that limit the amount of money that you can borrow from lawsuit funding companies. For instance, Illinois’s regulation limits lawsuit loans to $40,000. In this case, it is unlikely that you will be able to obtain additional settlement loans if the total amount of loans exceeds $40,000. With these laws, you have to find a way to make ends meet with less than $40,000 throughout your entire case. That’s even if you are seriously injured, cannot work, and the case takes years to resolve.
- Potential for abuse. Most legal funding companies adhere to ethical practices and interest rates consistent with industry standards. However, there are a few lawsuit lenders that charge higher than the norm. If you enter into a pre-settlement funding agreement without fully understanding the terms, you could end up owing a significant chunk of your settlement to a predatory lender.
- Possible influence on your willingness to settle. The decision to accept a settlement offer should always be made based on its fairness and the guidance of an experienced attorney. Not by the availability of settlement funding. While it is understandable that financial distress may create a desire for a higher settlement, prioritizing your attorney’s advice will reflect the best interests of your case.
Misconceptions and consumer protection guidelines.
Fact: Settlement funding companies play a critical role in providing financial support to plaintiffs during lengthy and costly litigation. However, due to its largely unregulated nature, misconceptions and misinformation plague the lawsuit funding industry. We want to make sure you understand the right strategies used by reputable financing companies, so let’s dispel any misunderstandings.
One common myth is that settlement loans must be repaid because of the term “settlement loan”, regardless of the case outcome. This falsehood is nothing more than a marketing ploy aimed at encouraging more plaintiffs to apply for lawsuit funding.
Nonetheless, the reality is that it would not be financially wise for lawsuit lenders to provide recourse loans on future settlements. Here is why. Requiring repayment in cases where there is no recovery would mean continuously operating at a loss, ultimately leading to the collapse of such entities.
Not only that, but if lawsuit loan companies engaged in such anomalies, it wouldn’t be long before they found themselves under full regulatory scrutiny. Regulatory action would be a non-negotiable consequence for the whole industry if these irregularities were truly widespread. Therefore, these are not normal settlement loan practices.
Settlement funding regulations.
Lawsuit funding regulations exist on a state level, with the rules varying from one state to another. Some states are fighting to require lenders to disclose settlement funding agreement terms to the defendant or insurance company. These disclosures include informing the other side the total amount you owe in settlement advances, the annual percentage rate, and any additional lawsuit loan fees.
Additionally, very few states, such as West Virginia, classify non-recourse advances as loans and impose usury laws, so lenders charge banking rates of up to 18% APR. It is because of these strict laws that pre-settlement loan companies have discontinued their services in states like West Virginia or Kansas due to the extreme risks. Sadly, these laws and lawsuit lending regulations indirectly help insurance companies that predate injured victims. Ultimately, financial assistance is not available in jurisdictions where settlement loans are forced to charge banking rates.
There is good news, however. Most states view settlement loans as investments linked to the results of a lawsuit, which are not subject to the same restrictions.
Whatever the case, always familiarize yourself with your state’s specific regulations and speak to your attorney before signing any funding agreements. In spite of its perceived lack of regulation, the pre-settlement funding industry plays an integral part in providing indispensable financial support to plaintiffs during their time of need.
The bottom line.
For plaintiffs who are facing financial hardship, settlement funding is a valuable tool. In addition to providing immediate financial relief, it allows you to get the necessary funds you need to fight for the justice you deserve.
Despite the higher interest rates, the non-recourse nature of the funding balances out the risks to lenders. These increased rates serve to offset the risk the lender takes in providing funds without the guarantee of repayment. Borrowers, on the other hand, are protected from additional financial burdens if the lawsuit does not conclude in their favor.
However, you should always consult with your attorney before making any lawsuit loan decision. And make sure you understand your state’s regulations and consumer protection laws.
You can apply for settlement funding online.
When looking for settlement funding, consider choosing a reputable lender that offers fair terms and transparent practices. Baker Street Funding is one of these companies known for its ethical practices and commitment to providing a secure and dependable solution to plaintiffs.
So if you’re in need of financial assistance while your lawsuit is pending, consider a settlement loan from Baker Street Funding. With competitive non-compounding low rates and a risk-free approach, we’re here to help you get through tough times. Apply today for pre-settlement funding and get funds in 24 hours or less.