The Pros and Cons of Pre-settlement Funding

Inflation makes it hard enough to keep the family budget balanced, but it becomes even more difficult when you cannot work because of personal injuries suffered in an accident or being wrongfully terminated by an employer. Assurances from your attorney that you have a strong claim to recover damages and that the at-fault party had the right type of car insurance to cover your claim do not help to pay your bills and any additional medical expenses while waiting for a settlement check.

Insurance companies and defense lawyers working for the party you are suing may refuse to settle your claim and use financial pressure to force you to settle for less than the true value of your claim. Several companies offer pre-settlement funding that gives you an immediate cash advance against the future settlement of your lawsuit without increasing your personal debt. 

Before applying for pre-settlement funding, you need to understand how it works and discuss the pros and cons with your attorney. It may not be for everyone, but it could give you the money you need to prevent the other party from gaining an unfair advantage in the lawsuit.

What is pre-settlement funding, and how does it work 

Funding companies that offer a cash advance based on the settlement value and likelihood of a favorable settlement of your pending lawsuit use different names to describe their services, including: 

·         Pre-settlement funding.

·         Settlement funding.

·         Lawsuit cash advance.

·         Lawsuit funding.

·         Lawsuit loan.

·         Litigation funding.

Regardless of the names given to it, most companies use a similar process to determine eligibility and terms of the cash advances they offer. 

Although it may appear to be a loan, pre-settlement funding is quite different from the mortgage on your home or the loan you got to purchase a car. Those loans were based on your personal ability to repay them. Part of the process to obtain a mortgage or other type of loan from a bank or financing company includes signing a promissory note that personally obligates you to repay the debt, which is very different from the repayment terms of pre-settlement funding. 

When you apply for a loan with a bank or credit union, the primary focus of the lender is on your credit report, employment record and current income. This is because lenders base their decision on your ability to repay the loan through monthly payments.

Other than your name and contact information, most of what a lawsuit funding company asks for in its application pertains to your lawsuit and the name and contact information for the attorney handling it for you. Pre-settlement funding is based on the strength and value of your lawsuit because repayment of the cash advance comes from the settlement or judgment. You are not personally obligated to repay what the funding company advanced and owe nothing in the way of interest or fees. 

Funding companies evaluate the type of case, the strength of the evidence supporting your claim for damages, and the likelihood of it ending with a settlement or judgment in your favor. There are benefits and disadvantages to weigh when deciding whether to apply for pre-settlement funding.

Benefits offered by pre-settlement funding 

Some of the factors that could make lawsuit funding an advantageous way to obtain the funds you need to pay bills while your attorney works to achieve a favorable settlement or judgment include the following: 

·         Non-recourse source of funding: As long as the terms of the pre-settlement funding contain a non-recourse feature, you have no personal obligation to repay the advance to the funding company. The funding company cannot come after you or your personal assets in the event the lawsuit does not end in a settlement or judgment that is in your favor. Essentially, if you lose the case, you owe nothing to the company that made the advance.

·         Does not affect your credit: Because it is not a loan, lawsuit funding does not burden you with additional debt or a monthly payment that affects your credit score. The terms of pre-settlement funding provide for repayment of the cash advance plus the interest and fees charged by the company only from any settlement or judgment awarded to you in your lawsuit.

·         Immediate influx of cash: Most companies offering pre-settlement funding promise that you can have the cash advance in your hands within 24 hours from when the company completes its evaluation of your lawsuit and approves your application.

·         Takes away financial pressures that could hurt your lawsuit: Money that you receive through as a cash advance against a future settlement lets you avoid falling prey to delaying tactics by the defense. It gives your attorney the time needed to negotiate a favorable settlement or take the claim to trial to get you the maximum recovery possible under the law.

The benefits of lawsuit funding depend on the terms of the funding agreement offered by the company that you ultimately determine offers the best rates and terms. Your attorney plays an important role by reviewing the funding agreement to ensure that it includes a non-recourse clause and does not obligate you to pay anything if you lose or if the settlement value does not cover the advance and costs. 

Pre-settlement funding disadvantages to consider 

Funding company websites and advertising frequently paint an overly rosy picture of the service they offer by focusing on the pros rather than the cons. The following are some of the negative factors to consider:

·         The industry is largely unregulated: There is no federal legislation governing pre-settlement funding, and very little in the way of state oversight according to the American Bar Association. It is left to you to research the companies offering lawsuit funding, gather information about the costs and the terms offered, and discuss it all with your attorney to determine whether a cash advance is the best option for you.

·         Companies charge for assuming the risk: Funding companies make money by charging interest on the cash advance that starts when you receive it and continues until it is repaid from the settlement of your lawsuit. The rates can be significantly higher than those charged by your bank for a personal loan because the funding company assumes the risk of loss if you lose the case.

·         Funding companies do not accept all lawsuits: You may be turned down for pre-settlement funding if the evaluation conducted by the funding company concludes that the likelihood of winning the lawsuit is not as great as you and your attorney may believe it to be. Companies may decline to approve funding if they conclude that the value of a settlement or judgment will not be high enough to repay the advance and its cost. 

Something to keep in mind about lawsuit funding is that delays in reaching a settlement increases its cost because the interest continues running until the claim is settled. Your attorney can offer an estimate of how long the settlement may take to help you estimate the cost of the funding. 

Conclusion 

It is essential to weigh the pros and cons of pre-settlement funding against other options that may be available to resolve your immediate financial struggles. Whatever decision you make, investigate the options and weigh the pros and cons of each one in consultation with your attorney.  

Author’s Bio:

Jared Stern is an experienced financial professional with six years of experience in the pre-settlement funding industry. After graduating from UC Berkeley with a degree in economics in 2014, Jared began his career in Morgan Stanley's mergers and acquisitions investment banking division. After working with another pre-settlement funding company for two years, Jared founded Uplift Legal Funding in 2017 to give injured plaintiffs a better choice in lawsuit loans.