A victim waiting to receive a litigation settlement needs financial aid. A settlement funding may seem like a quick and easy way to meet once financial woes. Settlement funding helps the victim make ends meet, awaiting a lawsuit resolution. The funding is also known and “lawsuit advance,” “lawsuit funding,” “a lawsuit settlement loan,” or even “litigation funding.” Settlement funding is a cash advance to the litigant for an impending settlement.
Put in the simplest terms. It is a financing available guaranteed by settlement proceeds. The borrower pays back the advance once settlement fund disbursement actualizes. Note the settlement funding attracts substantial interest rates.
The interest rates will also add to such a time when the court reaches a verdict on lawsuit settlement. Still, unlike standard loans advanced to a qualified borrower and secured anytime. Settlement funding is available while the case is pending.
Settlement funding may be a viable option for anyone if:
- You sustained injuries in an incident caused by someone else.
- Hired a lawyer and sued the responsible party.
- You need financial support to cover your expenses (living and/or medical expenses) during a pending case.
Who needs a settlement funding?
Are you a plaintiff in a personal injury suit? A victim waiting for civil rights, discrimination, judgment? Or heirs awaiting a deceased property case? You qualify for a settlement funding as cases take months or even years to complete.
As you wait for the trail and a ruling, you may not work, which results in loss of income. The loans come at your rescue, which seems like an oasis in a cash-dry desert full of expenses medical bills. You could be out of work because of the accident effects.
The settlement funding seems like a helping hand out of the blue for some victims. But the advance attracts has its drawbacks. These include and not limited to high-interest rates, often sky-high. The acute interest will eat up a large chunk of your settlement proceeds. Worse, the sector is new and unregulated. And you may fall victim for fraud and end up losing the settlement proceeds.
To avoid the high interested rates, consider borrowing from a 401 (k). You can also ask for financial support from friends and relatives. These are a better option than losing your settlement proceeds in the long run.
As much as settlement funding comes to your rescue, weigh all your options before applying for these risky loans.
How does settlement funding work?
Settlement funding is a new product in the financial market aimed at helping those embodied in legal suits and the need for financial help.
Here is how settlement funding works
Soon you file a personal injury lawsuit; you can apply for an advance with a lawsuit funding company. The company issues cash funding to any qualified applicant who awaits a lawsuit outcome and needs the cash. A settlement funding process starts with an evaluation. The company reviews your case to determine the amount of settlement expected. Most personal injury cases go through a trial. Thus, the settlement funding company will know exactly how much you might negotiate.
Settlement funding companies offer loans immediately. In exchange, you agree to repay the lender that sum of money “principle” plus a “funding fee” out of the settlement proceeds. Usually, the repayment is on hold until your case judgment. The lender gets paid from the settlement funds.
A qualified applicant for settlement funding includes:
- Medical malpractice case.
- Motor vehicle accident case.
- A personal injury case resulting from an accident caused by someone’s carelessness.
- Work-related or workplace accident case.
- Premises liability case (slip and fall).
- Product liability case (injured by a defective product).
- Wrongful death cases caused by someone careless to a loved one.
Eligibility for a settlement funding relies on the leading company assessment. You will provide the company with information about the case through an application. Do not fall for a settlement funding without consulting with your attorney. You need a proper understanding to get a better idea about the strengths of your case. And also, the likelihood of a favorable judgment on your side. A weak case on your side seems like a wrong shot to seek settlement funding. A lawsuit with a top success rate, in your favor, and high potential value judgment attracts an excellent funding offer.
Settlement funding assumes a considerable risk. The companies will only make advances to cases with a prime chance of success. In case you get an approval for the settlement advance, you will be liable for any interest—more fees adding up to the principal amount.
The delightful news with a settlement funding, the advance matures with the trial judge. You will pay back the loan with the settlement funds out. Once you have the proceeds, your attorney fees and related cost paid in full. You can settle the advance cash and charges.
The cost of settlement funding against future settlement proceeds
Settlement funding attracts a fee “funding fee” which can run between 2 to 4 percent per month. Sounds like a reasonable interest rate. Right? But think of it, the rate equates to an annual percentage rate of 27% to 60% or even more. Consider most lawsuits take years to resolve. And you may end up paying double or triple the initial principal borrowed.
Repay a settlement funding company
You will repay the loan with the settlement proceeds after covering all other expenses. By the time you settle with the defendant or a court judgment, costs will have accrued. You will need to pay certain expenses first before making settlement funding repayment.
Such expenses include:
- The lawyer’s fee, which is a third to a half of the settlement.
- Litigation expenses (process server fees, copy costs, and court costs).
- Medical liens (hospitals, doctors, and other medical provider services).
When you settle all the expenses and fees, your settlement funding company can collect from the proceeds left.
How to use settlement funding proceeds?
The crucial reason people apply for settlement funding do so because of their injuries hindering them from working. How do you meet your day-to-day expenses when you cannot work because of the injuries sustained? As a result, most people often face up with a scary prospect of mounting bills and debt. With limited options available, many seek settlement funding the only way out.
The lawsuit takes years to actualize in a settlement. Thus, you need an alternative. And the lawsuit loans should sort out your medical bills and cover day-to-day expenses.
What happens if I lose the case?
What will happen if the court does not resolve the case in your favor? In case of an unsuccessful settlement, there are two outcomes. First, you do not get any compensation. Second, the settlement or award is less than you expected.
Do both outcomes beg the question, “Are you liable to repay the settlement funding”? The answer depends on the agreement leading to a settlement funding. And how the lawsuit loan agreement structured. The lender cannot recoup the pre-funded amount unless you win your case, so the risk of loss is part of the business.
The amount left might be lighter than you agreed to pay back. As a following, the contract funding company cannot demand the difference. This in case the settlement or judgment is less than expected. As a substitute, the funding company may claim whatever settlement proceeds remain after it meets other costs. Attorney fees and court costs covered first. And then, the rest includes the settlement funding loan. On the downside, it leaves you with nothing at the end.
Reasons Not to Use Advance, Settlement Funding
As you await your lawsuit proceeds, living expenses continue to pile up, melting away your savings. In this dire situation, lawsuit loan may seem like the only option. But it is important to weigh other options before going to the settlement funding way risky loans in the sector. Let review some benefits and drawbacks of settlement loans.
Benefits of settlement loans
Settlement funding has some distinct benefits:
Funds your living expenses:
With lawsuit funding, you will get cash to cover your day-to-day expenses. You can also pay your medical bills in the meantime.
You do not need a good credit rating to get one:
Unlike regular loans, settlement funding companies do not rely on a favorable credit record. The settlement amount negotiated determines eligibility for lawsuit funding. The company focuses on the likelihood of the lawsuit succeeding. A suitable case with a high probability of success coupled with a large settlement attracts outrageous funding. The agreement expected is enough to cover the imperiling of guarantees a credit.
You get the funding quickly:
Depending on your specific situation, the settlement funding company can approve and fund your loan within hours or days.
High negotiation level:
Settlement funding gives you a high negotiation edge. Desperate for cash to cover your expenses and bills, you might feel pressed and fall for the first offer the defendant offers. You need not succumb to pressure in accepting the first settlement offer made. A loan can give you a breathing room in your current budget, allowing you to negotiate a better deal.
Drawbacks linked to settlement funding.
As you enjoy the benefits of a settlement in advance, the funding attracts serious drawbacks—the most being high costs.
Sky-top Interest Rates:
The settlement loan attracts high risk with the lender charging keen interest to cover the risk. Interest rates range from 20% to 60% a year.
Lawsuit Takes Years to Settle
As you await the settlement, you might get stuck paying interest fees years before the judgment actualizes.
Settlement Funding Is New and Heavily Unregulated
Settlement loans fall under state regulation. This creates many loopholes and issues affecting the plaintiff before embarking on settlement funding consultation with your consul. Also, seek an attorney general in your state intervention in case of a problem.
Settlement funding additional considerations
Although critics claim that the lawsuit loan sector is unregulated. Settlement companies face competition. They also follow industry best practices. As you seek settlement advance funding, their several aspects to keep an eye before you get the financing:
What is the total amount deducted from your last settlement or judgment to cover the advance?
What interest rates the funding attracts as your lawsuit drag on for years?
As a result, you should not shy away from undertaking some “comparison loan shopping.” Find the best company that offers the lowest rates and terms. Consult with a financial adviser to understand the interest rate the loan attracts. The prices may either simple or compound interest and how the lawsuit funding company calculates it.
Understand all aspects of settlement funding, including the broad term with other means of financial relief. These include forward spring agreements, settlement loans, and purchase loans.
Alternatives to lawsuit funding
As you already know, settlement funding is prohibitively expensive—and risky. Find other ways to get money without resorting to lawsuit advance.
- Personal loan: Cheap loans to services as long as you have a good credit score. Taking a personal loan can be a smart option for lawsuit funding. Good credit wins lower interest rates than you would pay for a lawsuit loan. Another advantage of personal loans is you can spread the payment for a longer time. It is usually 5+ years, which will earn you enough time to get the case resolved.
- Apply for a low-interest credit card: get a low-interest credit card. They charge a lower interest rate than settlement funding.
- Ask for family and friends to help with a low credit score or no credit card. You can ask your friends and family for help before resorting to settlement funding. Asking for help will save you a lot of money in the long run.
Settlement funding offers the much needed financial support to cover essential expenses. But the funding comes at a considerable cost. Interest costs are top considering the risk associated with lawsuit funding. The time to conclude a case also plays a part in dangerous interest.
Before committing to any loan or financial support, it may be better to pursue other sources of funding first. Settlement funding should be the last resort.