How Does Pre-Settlement Funds Work and What the Borrowers Need to Know

Pre-Settlement Funds

Pre-settlement funding is alternatively known as lawsuit advance, which offers the plaintiffs easy access to the funds well in advance itself before the actual case settlement is done. This is a boon to those who run a compensation lawsuit or so as they can use this money to meet the expenses of running a legal suit. However, this arrangement is a bit controversial, always like the laws related to it are still, and due diligence is warranted.

Getting funds before settlement

No doubt filing a lawsuit and running the litigating could prove out to be expensive and also time-consuming. Even if the plaintiff has chances to win and the verdict handed out for a settlement is likely, all these procedures may take its own course of time and until the money finally arrives to the claimant. During this period, the cost of running the lawsuit, and other life expenses around it may keep on mounting.

So, many of the lawyers advise their clients to look for options to fill this gap by applying for the fund advance models like:

  • Lawsuit Advances
  • Lawsuit loans
  • Consumer litigation financing by third parties
  • Pre-structured settlement loans
  • Non-recourse loans
  • Non-recourse advances
  • Alternative litigation financing etc.

Whatever name you may come across, these unique financial statements are meant to support the lawsuit runners but need to handle it with caution, especially in those states where there are no such regulations to monitor it.

What is settlement funding?

A lawsuit settlement funding or advance pre-settlement funding is the process of the plaintiffs availing money in advance on the bases of an expected court award before the final settlement is done. The financing company which offers pre-settlement funding may need to required documentation including the medical records and all information related to it to be shared the attorney to decide to release funds or not.

A pro tip on pre-settlement funding

Banks, traditional financing companies, or credit bureaus usually don’t offer pre-settlement loans based on the expected lawsuit settlements. Specialized lenders are doing it who is called a settlement advance companies. If you win the lawsuit, then the amount advanced plus applicable interest and service charges will go the lender. The most interesting part is that you owe nothing if the case is failed.

U.S. Chamber for Legal Reform Institute states that this arrangement involves some hedge funds which invest money in the lawsuits in exchange to the percentage of settlements. The practice of litigation funding seems to be started in Australia and then spread to other parts as the United Kingdom, Canada, the U.S., Asia, and Europe, etc.

Another comprehensive study held in 2018 on pre-settlement funding products revealed the process as a circuitous and complicated system, in which the median interest rates revolves around 44%. The study had shown that some funders also use some controversial techniques to calculate the amount owed by the clients. Such techniques include calculation of compound interests, minimum interest periods, add-on fees and contract costs, etc. However, the services of funding providers like PCFMoney.com are found to be largely reliable and cost-effective for the plaintiffs.

It is a fact that such financial products are unregulated in many states. So, they can be more expensive than a credit card or other forms of debt. CNBC reported that one such credit company disclosed their annual rate for pre-settlement loans might go up to 98 percent. Another such company disclosed that their minimum rate is 26.9% in the first year.

Are pre-settlement funds considered to be loans?

There are still confusions as to whether to consider litigation advances as loans. There are legal implications as to how these are classified, both for funder and the consumer as well. A trade organization which represents the funders’ state that these financial products are not considered to be loans and cannot be regulated like standard loans. The working of such fund advance is different from traditional loan products in many ways as they are not needed to be repaid if the settlement doesn’t materialize as the way it is expected.

Most notably, unlike other loan products, credit checks are also not required for such fund advance as these don’t involve any monthly repayments, and it also doesn’t affect the credit rating of the consumers. Some of the states consider it as investment arrangements than loans. However, this can be a problem for consumers as in case of other loans; the state laws may limit interest rates, which cannot be done in pre-settlement funds.

The working mode of pre-settlement loans

When people think of funding organizations offering pre-settlement funds and lawsuit cash advance, there is a misbelief that pre-settlement is a scam, which may ultimately hurt the personal injury victims or so. This may be a misbelieve a seven though some rare cases may have been reported as in case of any fund advance or loans, pre-settlement funds, when executed properly are to help the victims when they require it the most.

Pre-settlement funding process starts when you and the attorney agree to approach a funding firm to provide cash advance. You need to submit an application counter-signed by the lawyer too with all particulars of your lawsuit to the funding company. The company will scrutinize the application to see whether you are eligible. In this evaluation, your employment and credit rating are irrelevant, but it is just the strength of your case and the possibilities to get a favorable ruling. Usually, the funds will be released within 24 hours to 2 days once the application is approved. American Bar Association’s Commission on Ethics also has released white papers about pre-settlement funds by saying these products surely fills a need. However, the same commission also warned the lawyers as they should also look for the red flags pointing to the ethical issues also related to it. Responsible lawyers need to ensure that the client’s personal information and interests needed to be protected, and the clients also should understand all the terms and conditions related to pre-settlement funding before entering into any such agreements.

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