Plaintiffs who have instituted personal injury cases and are waiting for the settlements to be made can hardly miss the high decibel advertising promising swift financial relief. If you have been injured in an automobile accident, discriminated against in the workplace, subjected to medical malpractice, etc. and are finding it difficult to pay your bills while waiting for the settlement that your lawyer is working on, these advertisements may prove to be too alluring to resist. While lawsuit funding can surely act as a lifeline for the financially-distressed plaintiffs, experts opine that this funding route should be perhaps the last resort as they advances usually carry stiff interest rates and charges.
Those who have their backs against the wall and have really no other option to explore for paying their daily bills should at least make sure that they ask the right questions before taking on a pre-settlement loan. This will enable them to know and understand the impact of their decision before accepting the advance.
How Does a Pre-Settlement Loan Work?
When a plaintiff who has suffered a personal injury is not able to get adequate compensation form the party responsible for the injury, he might decide to engage an attorney to represent him in a lawsuit. Because these cases require time for the pre-trail processes to be completed and also for the trail to be conducted, he may find it difficult to sustain himself in the interim period before getting a favorable settlement. The situation may be compounded by the fact that the plaintiff may need to pay expensive medical bills and also not be in a position to work.
When the plaintiff approaches a lawsuit funding company, it evaluates the strength of the case with the assistance of the plaintiff’s lawyer. If the case has adequate merits for a favorable settlement, the loan company may agree to extend an advance that is subject to the terms and conditions such as loan amount, interest rate and fees, among others that will need to be agreed upon by the plaintiff, his attorney and the finance company.
The advance extended by the loan company is non-recourse and is in the nature of an unsecured loan. This essentially means that the company gets back the advance, interest and fees only if there is a favorable settlement. If the case is lost, the plaintiff has no obligation to pay back anything. If the settlement is less than expected, the plaintiff’s lawyer may try to negotiate better terms from the finance company.
How Much Advance Can Be Expected?
Even if the plaintiff anticipates a very substantial settlement; typically even the best lawsuit funding companies will extend a loan of a maximum of 10% of the expected value of the case. If this sounds very less, examine why this is so. Typically, one third of the settlement goes as the fees of the lawyer, and another third to pay off the medical liens that usually exist in these sorts of personal injury cases. Consequently, only the remaining one-third is available to be shared between the plaintiff and the loan company.
What Are the Caveats for Lawsuit Funding?
The lawsuit funding industry has been constantly plagued by accusations of non-transparency and very high interest rates and charges. Since there are no applicable federal regulations, individual companies can decide their own rates of interest and also whether such rates are to be charged on a simple or compound basis. Companies also levy a wide assortment of fees and charges under different labels, as a result of which, a client could end up with a bill of anywhere between 30-120% of the amount taken as the advance.
However, the financing companies offer a simple defense against high rates of interest. The nature of the advance is that of an unsecured loan, which means that the companies lose out if the case does not have a favorable outcome or if the settlement is less than that anticipated. While the client’s attorney is consulted with regarding the probability of a favorable outcome, no guarantees can be given regarding the settlement amount, hence all the financial risk is assumed by the loan company.
What to Ask Before Applying?
The first question to ask yourself and your attorney is regarding the expected time till settlement because longer the period, more the interest you will need to pay. It is also vital to ask if lawsuit funding is the only recourse available. Find out if you really have exhausted all other options like family, relatives, and friends, asset sales, possibility of a second job, etc. To ensure that you get the best possible terms, you should shop around taking care to examine the rates and terms as well as customer feedback regarding best practices. It is perhaps best to stick to one of ALFA’s 21 members who have agreed to abide by specified standards of transparency and disclosure of applicable terms. Get your lawyer on board because he’s likely to have had far greater experience in dealing with these funding companies and will be able to negotiate better terms with them, and warn you of potential pitfalls in the agreement.
Author bio: Penny Jones is the chief editor of an online personal finance channel. Her annual review of the best lawsuit funding companies is a widely-referred source of authoritative information by prospective customers, and industry alike.