Pre-settlement funding provides plaintiffs with immediate financial relief by giving them a portion of what the final settlement might bring. Plaintiffs can use this money to manage their expenses while waiting for the civil action to complete. Yet, how hard is it to get approved for pre-settlement funding today?

Why Choose Pre-settlement Funding

Lawsuits and litigation are time-consuming actions that can cost a lot of money. And even when the plaintiff has a good case, it will take some time before the funds from a lawsuit become available. Pre-settlement funding is designed to fill this gap and is known by several other names like:

 

  • Structured settlement loans
  • Lawsuit loans
  • Lawsuit advances
  • Third-party consumer litigation financing
  • Alternative litigation financing.

The caution plaintiffs should take when considering a pre-settlement loan is the same regardless of the name used to refer to the process.

Qualifying for Pre-settlement Money

Individuals interested in how legal funding works should be aware that any money received before a settlement or verdict represents an advance.

 

The party providing this advance will likely need a good deal of documentation before releasing the plaintiff’s necessary funds. The documentation may include accident details, lawyer contact information, and medical records.

Entities offering pre-settlement funds must be careful about the plaintiffs approved for a pre-settlement advance. But a plaintiff with a decent chance at a successful lawsuit should not be much of a problem.

When the plaintiff wins the lawsuit, they become responsible for the money they borrowed in addition to the interest they agreed to pay. Plaintiffs who are unsuccessful with a case do not have to repay the funds received in advance.

One well-known critic of pre-settlement funding is the United States Institute for Legal Reform. The institute says the practice is a scheme concocted by greedy hedge funds to invest in lawsuits and gain a sizable slice of subsequent judgments.

The Argument Against Pre-Settlement Funding

The most common problem with pre-settlement funding is the fees and interests attached to these loans. Fees and interests are often excessive, and some critics say the transactions fall into the category of usury.

No regulation exists for the fees and interest associated with pre-settlement funding in most states. The interest rates are so high that they may cost the plaintiff more than credit card debt. It is not uncommon for interest rates to equal well over 20 percent.

One critic complained that pre-settlement funding companies use less than straightforward calculation methods to add to their bottom lines. Two controversial techniques include compounding interest and manipulating the minimum interest periods.

Critics also claim that some plaintiffs reject reasonable settlement offers because of the fees attached to pre-settlement funding. Some of these critics claim that many companies providing pre-settlement funding will sometimes take over settlement negotiations for a plaintiff.

Legal Gray Area

States are not in agreement on whether pre-settlement funding should become regulated like any other type of loan. How a particular state views these transactions carry legal implications for both the entity providing the funds and the plaintiff.

Pre-settlement funding providers argue that these agreements are not loans since plaintiffs do not repay any money if they lose the lawsuit. Another argument these entities use is the absence of credit checks and monthly payments.

Some states view pre-settlement funding as an investment. But this designation can also turn into a double-edged sword for plaintiffs since state laws that limit interest rates only apply to loans.

The Bottom Line

Pre-settlement funding is a viable option for plaintiffs who need money to fund their legal efforts. A successful lawsuit will mean the money advanced to the plaintiff must be repaid with high interest. While getting approved for pre-settlement funding is not that hard, plaintiffs should carefully consider both the benefits and the consequences of applying for such funds before deciding if this type of agreement fits their needs.