A person who is pursuing a personal injury claim, or in some cases a claim for a work-related injury, may be tempted by the idea of obtaining lawsuit funding to help pay for their personal expenses before their case is resolved.
Due to the risk involved in issuing a non-recourse funding, the fees associated with pre-settlement funding are significant. There are also legal, ethical, and practical issues that should be taken into consideration by any person who considers applying for pre-settlement funding.
In a typical scenario, when an injured person has a pending legal action and desires pre-settlement funding, that person will contact a finance company that offers pre-settlement lawsuit funding. The finance company contacts the lawyer who is handling the case, and obtains information about the case. Based upon that information provided, the finance company estimates the value of the likely eventual settlement or verdict, and offers a cash advance to the injured person based upon that estimate.
The amount of money that will be made available through pre-settlement financing and the fees charged for the funding depend upon the nature of the case, the amount of money that is likely to be recovered, and the company involved. Many companies offer pre-settlement funding amounts between $500 and $25,000. A few offer amounts up to $100,000. Some companies will fix the fee for the advance up front. Others will charge a monthly fee for each month between the time the funding is issued and when it is repaid, sometimes as high as 15% per month.
When the case settles, or the defendant pays the verdict after losing in court, the loan and associated fees are paid to the finance company from the injured person's share of the recovery.
These advances are offered as non-recourse funding, which means that an injured person has no obligation to repay if the lawsuit is lost. Similarly, if the ultimate settlement or verdict is smaller than anticipated, the amount that must be repaid never exceeds the amount of the injured person's share of that verdict or settlement. For legal reasons, these advances are not characterized as loans.
Litigation can take a very long time. Some cases drag on for years. While cases are pending, even where an injured person's attorney is paying all of the legal expenses associated with the litigation, the injured person has to have enough money to get by. If an injured person is unable to work, has reduced income, or has expenses associated with care or disability, it may not be possible to wait until the end of the lawsuit before obtaining funds.
Given the fees involved in pre-settlement funding, it is important for injured people to consider any available alternatives. This type of financing should ordinarily be the last resort. The fees are premised upon the risk to the lender associated with non-recourse lending, but injured plaintiffs must keep in mind that these companies choose their cases carefully in order to minimize risks. If they offer an advance they believe both that the plaintiff will receive money from the lawsuit, and that the amount will be sufficient to cover both the advance and their fees.
A plaintiff who wants to obtain pre-settlement funding should check with several companies, in order to obtain the most favorable terms. The plaintiff should discuss their desire for pre-settlement funding, and alternatives that may be available, with their lawyer.
A question that perhaps seems obvious is, why can't injured people simply borrow money from their lawyers? The answer is that when a lawyer becomes a creditor to a client, a conflict of interest is created that may interfere with the attorney-client relationship.
Sometimes an attorney won't want to sign any contract with a settlement financing company, and some states prohibit lawyers from signing onto liens of the type necessary to secure this type of funding. As a result, pre-settlement finance companies will normally require that the injured person sign the contract, and that the attorney sign an acknowledgement of the client's instruction that the advanced funds and associated fees be repaid from any eventual verdict or settlement.
At least one state (Florida) prohibits lawyers from participating in the settlement funding company's case evaluation process. Absent lawyer involvement, it is unlikely that a finance company would be able to obtain enough information about a case to risk issuing non-recourse funding.
In order to avoid usury laws (laws against charging excessive rates of interest), the funds you receive from a pre-settlement funding company will not be described as a loan. For example, the advance might be described as an investment, a cash advance, or as venture capital.
Technically, as the contract is not to repay the amount received but is instead a promise to pay a portion of any eventual verdict or settlement (which may never occur), these amounts are not loans. No matter what happens, a person who receives pre-settlement funding keeps the full amount of the advance.
A Michigan court held invalid a lawsuit funding contract where the defendant's liability had been established, holding that as the plaintiff was certain to recover some amount of money the funding company's advance was no longer contingent, and thus that the plaintiff only had to repay the principal (without interest) under Michigan's usury laws. While other states may draw different conclusions from similar facts, it remains necessary that the amount be in some manner contingent - otherwise, it is a high interest loan.
An Ohio court similarly discharged a plaintiff's obligation under a lawsuit funding contract on the basis of a common law doctrine called champertry -- a prohibition against the sale of a party's interest in a lawsuit. The court's rationale was that the lawsuit funding company sought to profit from the injured woman's case, and that lawsuit funding could create a disincentive to settle a case, where the plaintiff would have to pay the entire amount of the settlement to the finance company. A response to the first argument is that if it is acceptable for an attorney to profit from an injured person's case, why should it not be permissible for a finance company? A response to the second argument is that had the woman not received the funding, she may have been forced to settle the case for far less than its value.
Another concern is that lawsuit funding might encourage plaintiffs to file frivolous lawsuits. This, however, does not consider the fact that lawsuit funding companies are sophisticated investors that want to be repaid, and thus are not likely to offer funds to plaintiffs who don't have strong cases justifying substantial awards. Similarly, it will often be in the strongest cases that a plaintiff is most in need of money before the conclusion of a lawsuit, and the absence of sources of funding can force premature and inadequate settlements.
Pre-settlement lawsuit funding should be considered as a last resort, to be considered only after all other funding options are exhausted. Due to the high cost of this type of funding, any decision to accept an advance should be made very carefully. When seeking pre-settlement funding, it makes sense to check with several companies, to obtain the lowest possible fees.