Pre-settlement funding can serve as an essential lifeline for a plaintiff embroiled in lengthy litigation. Lawsuit loans come with interest, and in the event of a lengthy lawsuit, a plaintiff could lose much or all of their settlement. So there are many factors to consider if pre-settlement financing is right for you.
The National Law Review (NLR), interviewed Mark Berookim (MB), director and co-founder of High Rise Financial LLC, a multi-state legal finance company, about issues to consider if you are considering taking out a loan in court and what it could mean for your institution and your finances. The NLR thanks Mark for his insights and opinions.
NLR: Can you explain the difference between pre-settlement funding, trial loans, settlement loans and cash advances?
MB: The terms “lawsuit loans”, “settlement loans” and “cash advances” are often used synonymously with “pre-settlement funding” in the industry to refer to money provided to plaintiffs during litigation.. Dans le financement pré-règlement[siledemandeurperdsonprocèsiln’apasàrembourserlasociétédefinancementLetermepréférépournotreindustrieestlefinancementpré-règlementpourdiversesraisonsmaisbeaucoupdegensl’appellentun«prêt»etlestermessontsouventutilisésdemanièreinterchangeable[iftheplaintifflosestheircasetheydon’thavetopaythefinancingcompanybackThepreferredtermforourindustryispre-settlementfundingforavarietyofreasonsbutalotofpeoplecallita“Loan”andthetermsareoftenusedinterchangeably[siledemandeurperdsonprocèsiln’apasàrembourserlasociétédefinancementLetermepréférépournotreindustrieestlefinancementpré-règlementpourdiversesraisonsmaisbeaucoupdegensl’appellentun« prêt »etlestermessontsouventutilisésdemanièreinterchangeable[ iftheplaintifflosestheircasetheydon’thavetopaythefinancingcompanybackThepreferredtermforourindustryispre-settlementfundingforavarietyofreasonsbutalotofpeoplecallita“Loan”andthetermsareoftenusedinterchangeably
Pre-settlement funding is essentially a cash advance against your expected settlement or court decision. Reimbursement for the lawsuit loan comes directly from your compensation program rather than your bank account, and you owe nothing if you end up losing your lawsuit. It’s a way to get some of any potential compensation here and now while your attorney works out a proper settlement. Court loans or pre-settlement funding do not need to be repaid if you lose your case, but court loans must be repaid with interest if you win.
For court loans, you must have a lawyer representing your case and if you need the money, especially in court, make sure you have exhausted other options before taking on additional debt.
LNR: What is the advantage of choosing pre-establishment funding over others lawsuit funding choice ?
MB: Pre-settlement funding can be a good choice for people in the middle of litigation, mainly because it is non-recourse. This means that the lawsuit finance company cannot pursue repayment of the loan from your bank account. Instead, you repay the lawsuit loan from your settlement or compensation. If you don’t win your case, you don’t have to repay the pre-settlement financing. And while court loans don’t have to be repaid if you lose your case, court loans do have to be repaid if you win your case and they do bear interest. A plaintiff could lose much or all of their settlement or compensation, so this is an important decision that should involve your attorney.
More than $100 million in lawsuit funding is issued each year, but the legal funding industry is not uniformly regulated. All legal finance companies face strict limits on the amount of capital they can put at risk in a single case.
Typically, legal finance companies will advance you about 10% of the value of your potential settlement. For example, if you were expecting a settlement of $100,000, your maximum potential lawsuit loan amount in this situation would be $10,000. The typical range of financial institutions will offer you a loan of 5% to 15% of your early settlement value ratio as a lawsuit loan.
LNR: What does it mean for a loan to be “non-recourse”?
MB: “Recourse” is a term that refers to the ability of a finance company to pursue repayment of a loan. Since pre-settlement funding is non-recourse in nature, as it is an advance of funds based on an estimate of the future settlement of a lawsuit. The refund is tied to your projected compensation or settlement package, so the finance company will get an agreed-upon portion of your settlement or jury award while you keep the rest. In cases where the lump sum is greater than the agreed amount to be paid to the finance company, your lawyer will repay the lawsuit loan on your behalf before paying you the remainder of any settlement.
A recourse loan is a loan where the lender can continue to demand payment even after taking the security associated with the loan if the security does not match the full value of the loan. If you lose your case and receive no compensation, you do not have to repay the finance company. If your lawsuit compensation is less than the agreed-upon loan repayment amount, the finance company will receive your compensation or settlement and you will keep the pre-settlement funding you have already received.
Lawsuit loans are interest-bearing, and while they don’t need to be repaid if you lose your case, they are if you win, so these are important decisions involving your attorney.
LNR: How do loans before settlement work?
NB: The pre-settlement loan begins with the application process. A plaintiff in an ongoing lawsuit may request funding prior to settlement, providing details of their claim and contact information for their attorney. Underwriters from the pre-settlement finance company then review the details of the lawsuit and decide on the amount of financing the company can provide.
Lawsuit finance companies can often estimate your settlement amount based on the defendant’s insurance policy and your claim. If the size of an applicable insurance policy is unknown, your state’s minimum coverage laws for the incident in question can frequently be used as a point of reference.
Although you may want to borrow as much as possible with a legal loan, legitimate legal finance companies discourage plaintiffs from borrowing too much.
Once you sign the financing agreement, the money belongs to you according to your needs, unlike medical liens. There are no restrictions on how to spend the funding before settlement (although investing it would make it taxable).
If you received compensation, and after your lawsuit is over, your attorney sends a check to the pre-settlement finance company for the agreed-upon reimbursement amount on your compensation, settlement, or court decision. If you lose your case, the risk is on the finance company rather than you, and you don’t have to repay the loan if you lose your case. Although you must repay the loan if you win, it is an interest bearing loan.
LNR: You mentioned medical privileges, what are medical privileges and how do they work?
MB: Essentially, medical liens are very similar to pre-settlement financing agreements with one crucial difference: the financing company only pays your medical expenses. With pre-settlement funding, you can use the money however you see fit. When you opt for a medical lien, the finance company pays for your medical care and is reimbursed on your compensation.
It’s a bit like how health insurance works. Your health insurance could now pay for your covered medical expenses. However, if you are later compensated for medical expenses, having a lien means that the money will go directly to the health insurance company rather than to you (since they are the ones who paid for your medical expenses) .
NLR: What types of lawsuits are eligible for legal funding?
Mo: The short answer to this question is that, to be eligible for pre-establishment legal funding, you must:
Live in a state served by your legal finance provider,
- Have a lawsuit in progress,
- AND be represented by a lawyer.
Most types of personal injury claims will be eligible for lawsuit funding, including motor vehicle accidents, slip and fall injuries, medical malpractice, nursing home negligence, tort claims, dog bites and unsafe product claims. Before applying for a lawsuit loan, please note that not all states allow this type of financing. Some states have laws prohibiting court lending, so a pre-settlement finance company may not be able to help you.
NLR: What are some of the benefits of pre-establishment funding? for lawyers?
MB: Although attorneys in most states are not legally allowed to lend clients’ money directly with interest, pre-settlement financing can also benefit attorneys. In some cases, there may be pressure to come to a quick settlement even if the amount offered is less than what may be owed, because cash is needed immediately for expenses that cannot wait.
Also, many defendants will try stall tactics to force you to settle for low offers. If you’re able to fight for your settlement longer, you might give your attorney more time to build a stronger case. Pre-settlement funding can ease your current financial headaches and reduce the burden of going to court and having a lengthy trial. Although the amount advanced will be deducted from your compensation, settlement, or court decision, pre-settlement funding is a tool your lawyer can use to your advantage.
NLR: What are some of the things to look for in a pre-settlement finance company?
MB: Look for a pre-settlement loan company that pays above average attention to quality, customer service and customer satisfaction, one place to look is Google Reviews, where there should be a large number of reviews and a large number of five-star reviews. Also look at the Better Business Bureau rating of the loan company.
Additionally, attorneys might want to seek out a pre-settlement loan company that offers litigation funding for a wide variety of cases. Some loan companies only provide financing for a certain number of types of legal cases, and they are not always non-recourse.
Make sure the interest rate is right for you when deciding on a court loan. A high interest rate can leave you with little or nothing to take home from your establishment. A reputable legal finance company will clearly identify the interest rate on your court loan and discourage plaintiffs from borrowing too much.
NLR: Thank you Mark for sharing your thoughts on pre-settlement loans.
This column does not necessarily reflect the opinion of the National Law Review or the National Law Forum. LLC.
Copyright © 2022 National Law Forum, LLCNational Law Review, Volume XII, Number 181