Over $1 Billion Won
For Our Clients

Pre-settlement Financing and Why You Should Avoid It

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 generallynot 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 loan amount!

Pre-settlement loans versus structured settlement buyouts

Regardless of how it is structured, pre-settlement loans arepersonal 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 of interest.

On the other hand, a structured settlement loan or settlement buyout involves money that you arealready 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 generallynot 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.

Request Free Consultation

Tell us about what happened


Contact Us
Request Your Free Consultation and Our Lawyer Will Contact You Within 1 Hour

"*" indicates required fields

This field is for validation purposes and should be left unchanged.
This field is for validation purposes and should be left unchanged.

* Required Field