What is a Settlement Loan?
Many consumers who have a pending lawsuit and need cash before their cases settle will research a “settlement loan” or “pre-settlement loan.” In actuality, a settlement loan is not a loan or lawsuit loan at all. What it really is – is a cash advance off their pending case. The reason why it isn’t a loan is because there is no recourse from the “funding company” if your case ultimately fails. You read that correctly. Even if a plaintiff if doesn’t win their case, they don’t owe anything back. So, unlike a bank, a settlement loan is a no-risk proposition for the consumer.
Why do people take a pre-settlement loan or cash advance off their case?
The number one reason that people take funding from their pending lawsuit is to pay their bills. Whatever those bills may be: Mortgage, rent, car payment, utilities, college tuition, medical expenses, back-to-school costs, Christmas presents… Even for starting a new business or financing a vacation; anything that the consumer wants to use the money for, they can. The choice is up to them to decide if a monetary influx is important to their needs at this time.
Most law firms will caution their clients to only settle in advance if they have nowhere else to turn for relief. A lawsuit funding firm, however, will get you your cash in hand without fighting through a labyrinth of red tape.
What is the cost to take advantage of a lawsuit loan or advance?
Well, this is where the fine-print comes in. In short, lawsuit funding is expensive. The funder is taking a risk in making an investment in your case. Remember, they don’t get paid back if you lose. So, naturally they need to get a competitive return to make up for any losing cases they invest in. This is the reason why funds should only be taken if needed. Costs case range from 1.99% per month to 3.99% per month in compounding interest. Most have rates ranging from 30% to 60% annually, and there are also different types of contracts that charge no more than 200% of the amount funded. Every funding company is different, but the money is not free. It is important for a consumer to speak to a reputable company that has fair rates and fees to ensure that when it comes time to settle your case, that your settlement loan company doesn’t take the lion’s share of the settlement.
Many people think that once you take a settlement loan that you are selling your lawsuit. That is not the case. The funding company only wants to invest in a portion of your recovery, charge you usage fees or “interest” as if it were a loan, make a return, and move on. They don’t want to own your case or buy it from you.
How long does it take to get a settlement loan or pre-settlement advance? And what is the process?
The process is to fill out an application from a funding company who will then request documents from your law firm. Once the law firm—per your instructions—sends back the needed case documents to review the case, an underwriter will review your file and make an offer. The offer will be based on the expected value of your case and risk associated with it. Not every case will be approved; only cases that have clear fault on the defendant and clear injuries to the plaintiff will be approved. Defendants must also have good insurance to ensure someone will pay for the damage they caused to the plaintiff.
Are there any upfront fees or out of pocket costs?
The funding company will provide you with a contract that is totally risk-free. Meaning, if you don’t like the terms, you simply can deny the funding and move on. There are no out-of-pocket costs for your free evaluation and once you fund, there are no payments made to the funding company (such as a monthly credit card payment) until the case settles. At that time, your lawyer will directly pay the funding company any amount owed on your contract. The good news is, that whether you like the terms or not, lawsuit funding contracts are very transparent and explain exactly what you will owe when your case settles. In essence, the longer your case goes, the more you will need to repay. So, if you think your case will settle in a year, then all you need to do is look at the payback price that is due after one year to see if it is worth proceeding. For example, if you obtain a settlement loan or advance of $10,000 and your payback says $15,000 after one year, then your cost will be 50% for the year. The consumer then can decide in their own mind is this worth it? Do I want to give up $5K later to get $10K today? Do I want to take risk and maybe get nothing from my case?
These questions are up to the consumer. Lawsuit funding provides consumers with financial options. Some may be good or some may be costly, but at the end of the day, the decision to proceed is up to the consumer. Lawsuit funding is a viable service when utilized correctly.
When is it prudent to obtain settlement funding or a settlement loan?
Here are just some scenarios:
- If you are facing eviction and will be on the street or it will cost you a lot more money to move than what the funding will cost you.
- If the defendant’s insurance company is trying to force you to take a lowball offer and you need cash now, but know that if you wait, your case will be worth a lot more in the end.
- When you are out of work and have a lost wages claim, and need funds to supplement your lost income.
- When you need to pay for medical bills or services to get yourself better, and waiting for funding will cause excessive suffering.
- Settlement loans can be useful if you are scared about going to trial and losing your lawsuit. Taking at least partial money off your case now ensures that you will get something, no matter what happens.
Is taking a settlement loan legal or permissible in my state? And can anyone stop me from taking money off my case, such as my lawyer?
Each state has different rules for settlement funding but in most states, obtaining a settlement loan is permissible. The funding company will know which states can or cannot fund and in which states have rate caps. However, most states do not regulate lawsuit loans very much, and there are many states that have no caps on the costs that you can be charged. That is why you must ensure that you are working with a reputable funding company that provides fair rates. Your lawyer can help you with the process if you ask their advice, they may also discourage you from taking funding on your case, but ultimately the decision is yours. Some firms do not advise their clients to take funding, but consumers can always leave a law firm and seek different legal council if the law firm will not sign the funding contract. Ultimately the choice is the consumer’s whether they want to take money from their case or not. Most lawyers or law firms don’t know the dire situation their client is in, and simply cannot understand the need to get by. Taking even a small advance to pay bills may be a huge relief.
If I’m approved, how long does it take for me to get my money?
In most cases, during the funding process, the funding can occur within 24 hours of sending back a fully executed lawsuit funding agreement that is signed by you and your law firm. Funds will be deposited directly into your bank account or a check can be overnighted to your home. All you need to do is provide the funding company with either your banking information or address where you will receive your funding check.
What if I need more funding? Can the funding company fund me more than once?
Yes, as your lawsuit progresses and more facts come out about the strength of your case, you can always apply for more funding. Some plaintiffs have funded 5 to 10 times as their cases drag through the courts and they are going in and out of medical treatments or in and out of work. There are also funding companies that will consider funding you, even if the first funding company has stopped funding you. These are called buyouts of an existing funding amount owed. In some cases, if your existing funding is very expensive it is possible to refinance your position at a lower cost to save money. This is similar to a refinance on a home mortgage.
What about credit checks, employment history? Do the funding companies check on that?
No credit checks are performed in order for you to get approved. And you don’t need a job since there are no payments made once you receive the funds. The only thing needed to get approved is an evaluation of the merits of your case. If your case is strong, then you will not be denied unless you are in an active bankruptcy or owe child support liens.
What cases do lawsuit funding companies take when making settlement loans?
Most funding companies focus their efforts on car accident and personal injury cases. However, many funding companies will consider almost any cases in which there is liability, damages, and insurance. These are the 3 main components to evaluate a case: Liability means someone did something wrong, Damages means they caused some type of harm to someone, and Insurance means that there is a party that has the money to compensate the injured party.
Cases that fall into these categories are endless but could be any of the following: Car or truck accidents, boat accidents or Jones Act or Maritime cases, slip and fall or trip and fall cases, sexual abuse or harassment cases, wrongful termination, discrimination cases, wrongful imprisonment or police brutality cases, clergy sex abuse cases, construction or labor law cases in NY, Qui Tam or whistleblower cases, commercial litigation or breach of contracts, verdict on appeal or judgment on appeal cases, surgery funding cases, Premise liability cases, bad pharmaceutical drug cases, product liability or mass tort cases, wage dispute cases, and medical malpractice cases.
How do I pick a settlement loan company?
The most important thing in picking a funding company is to ensure that they are a direct funding source. What this means is that if you call a funding company up and they are simply a broker sending your case to another funder, then most of the time you are going to pay more because of broker fees. You need to ask a funding company if they are a direct funding company or a broker and also ask them what they charge for their monthly funding rate. Any companies that charge more than a monthly compounded rate of 3% is too expensive. You need to be prudent so that you don’t pay back more than is necessary. Most reputable funding companies want you to get a fair deal; those are the ones you want to deal with. Click here to learn more about us and our company.
Yes, you should always speak with your law firm first. Even if it is just with your case manager and not your lawyer. Remember, you will need your law firm to cooperate and send over your documents. So, one of your first calls should be to your law firm to let them know you are in some financial trouble and need their help in obtaining a settlement loan. Once they are on board then the rest of the process will go smoothly. And if all goes well, from start to finish you could have your funds in as little as 2-3 days from the time you initially applied. For this to happen, it is essential that your law firm is in your corner and ready to help you in this time of need. If you would like to learn more about settlement loans, check out Investopedia’s article here. If you’re interested in getting a settlement loan or would like more information, contact us today for more information.