An accident attorney takes a critical look at "lawsuit financing"
Over the past decade there has been a sharp increase in the number of “lawsuit
financing” businesses. Many of these operations offer what, on the
surface, appears to be a service that benefits the cash-strapped accident
victim by loaning money that will eventually be paid back after a lawsuit
is settled. Since such loans may be an alternative to more difficult-to-arrange
conventional loans, you consider applying to a “lawsuit loan”
organization for financing to tide you over until your case is settled.
In today’s post, our personal injury accident lawyer explains the
basics of pre-settlement lawsuit financing and why such “loans”
or “cash advances” are generally
not in the best interests of the borrower.
How pre-settlement lawsuit financing works
The workings of a pre-settlement loan are best explained by an example.
For our purposes, let’s assume that you were involved in an accident
and have immediate need of $50, 000 to cover your medical expenses, mortgage
payments, and other such bills and expenses. Since your only real “asset”
is the future value of your lawsuit against the party responsible for
your injuries, your loan requests have been denied by your bank and credit
union. You then call the toll-free number of a lawsuit financing company
that regularly advertises on late night television.
After consulting your attorney regarding the details (such as amount of
damages anticipated and the time frame involved in reaching a settlement))
of your lawsuit, the company proposes that it will “lend”
or “advance” you the $50,000 to be repaid, with interest,
when your case is settled. Since you are aware of the adage that states
“If it sounds too good to be true, it probably isn’t true”
you soon discover that the lender will charge you an annual interest rate
of 40% and that you are authorizing your lawyer to make a direct payment
of the entire amount as soon as the settlement is approved by the court!
You also learn that, even in the unlikely event that you lose your case,
you may still be liable for any interest that may be due on your original
Pre-settlement loans versus structured settlement buyouts
Regardless of how it is structured, pre-settlement loans are
personal financial contracts between you and a private lending agency. That lender is assuming the
risk of not being paid back if you receive less money than anticipated
in a settlement or if you should lose your case at some later date. Consequently,
the lender is charging a substantial fee for its services in the form
On the other hand, a structured settlement loan or settlement buyout involves
money that you are
already legally entitled to receive (such as a settlement related to long-term
medical expenses or other losses) but that money will not be paid to you
until some future date, generally a series of annual payments over the
course of several years. The buying agency will pay you a lump sum settlement
that usually represents only 25% to 60% of the face value of your original
settlement’s cash value and will pocket the difference in the amounts
involved as its profit.
In either situation, you should know that pre-settlement financing and
structured settlement buyout companies are generally
not subject to state or federal regulation of their business practices or the amount of interest or other fees that
they may charge their clients
Alternatives to pre-settlement Financing
As one personal injury attorney has observed, “Dealing with a pre-settlement
lawsuit financing company is like dealing with a loan shark except that
the loan shark doesn’t have the law on his side if you don’t
pay back what you borrowed.” Since it is not unusual for such businesses
to charge in excess of 50% annual interest, this is indeed the case with
many lawsuit financing operations.
If you are considering dealing with a law suit financing business, you
must seek the advice of your personal injury lawyer regarding whether
such an agreement is in your long-term best interests. In fact, all personal
injury attorneys are familiar with other means of financial support that
may be available to their clients and will be happy to assist you in applying
for such support while your case is awaiting trial.
In summary, if you are the plaintiff in a personal injury lawsuit and you
are facing mounting debt and other expenses that are directly related
to your injury, a pre-settlement loan may be an attractive alternative
to filing for personal bankruptcy protection. However, such financing
can be quite expensive due to the high interest rates that are typically
seen in such agreements. Your best strategy is always to discuss your
financial situation with the personal injury lawyer who is managing your
lawsuit before deciding whether to enter into such an agreement.