A Quick Guide to Pre-Settlement Funding
What is Pre-Settlement Funding?
Also known as “lawsuit funding” or “lawsuit loans”, pre-settlement funding provides immediate cash to plaintiffs (mostly in the personal injury arena) prior to settlement. There are no limitations on how the cash can be utilized and is often used to pay for medical procedures or living expenses.
The need for pre-settlement funding normally when a plaintiff is injured due to the negligence of another. Often, the injured plaintiff is unable to work and has difficulty paying expenses such as car payments, rent, or other monthly obligations. Unable to endure the long, drawn out, litigation process, plaintiffs are sometimes forced to accept “low ball” settlement offers just to find some relief.
Lawsuits take time to resolve. Both parties, and their attorneys, are making sure no stone is left unturned to find both the maximum value of the case and also any possible defenses. The discovery process can sometimes last for years. All the while, plaintiffs borrow money from their friends, family, home, etc. to find some relief.
Strapped for cash plaintiffs are relieved to know there is a solution. Lawsuit funding provides immediate cash so they can wait for just compensation. Their attorneys are free to do their job and secure a fair outcome.
Pre-settlement funding is also helpful in medical treatment if there is no insurance available to pay for surgical and/or other medical procedures.
Although many attorneys sign a letter of protection for the entire amount of the physician’s bill, lawsuit funders routinely negotiate a ‘cash price’ for the procedure and the client “finances” that amount which is paid out of settlement. This alternative lawsuit funding method can save plaintiffs tens of thousands of dollars when the settlement is disbursed.
There is no lawsuit funding without attorney cooperation. Without attorneys, investors would not be willing to invest in lawsuits, period. Requiring settlement proceeds to pass through the attorney’s trust account is one of the major safeguards investors use to protect their investments.
But when we talk about attorney involvement, we are not talking about attorneys negotiating the terms of the deal. What we are talking about is attorney cooperation through the various phases of funding process, which are the following:
- Client or attorney contacts funding company and applies for funding.
- Funding company requests relevant paperwork from attorney.
- Attorney sends paperwork to funding company via fax or email.
- Funding company reviews documents.
- Funding company places call with attorney as part of the underwriting process.
- Offer is made to client.
- Client and attorney sign the contract.
- Client is funded.
- Case is resolved with a monetary award/settlement.
- Attorney repays advance to funding company.
You will notice that of the above described steps to lawsuit funding, plaintiff’s attorney is involved with more than half of them and thus an integral part of the process.
Attorneys know what makes a good personal injury case. Good liability, permanent damages and the defendant’s ability to pay are all necessary for the case to be successful. Without any one of the three, the case usually falls apart.
Lawsuit funding underwriters understand this as well. Therefore, the paperwork requested always includes these three facts of a personal injury lawsuit. Once the paperwork is received, there are usually questions the underwriting department needs to ask. More often than not, the questions are satisfactorily answered and the case is approved for funding.
If more questions arise, which is sometimes the case, they must be answered by the attorney’s office. Because a lawsuit funder’s investment loss is a total loss, no deal is made until the underwriter is comfortable.
The lawsuit funding transaction is sometimes called a “lawsuit loan”. This is a misnomer because the term “loan” implies the obligation to pay a sum in the future. The typical lawsuit funding deal imparts no such obligation on the part of the plaintiff because if the case is not successful, for whatever reason, there is no requirement the advance be repaid.
Instead, the lawsuit funding transaction is thus a partial transfer of property rights in the future proceeds of a lawsuit. If there are no proceeds, (if there is no recovery) the funding enterprise loses its investment. It’s really as simple as that. Because of this, the deal is deemed “non-recourse.
A great deal of propaganda can be found touting the advantages and disadvantages of this type of financing. We will not discuss these topics herein. Suffice it to say that thousands of personal injury attorneys nationwide, utilize lawsuit funding as a part of their practices.
Funding a lawsuit is very subjective. Offers can and do occasionally vary greatly from company to company. There are some general “rules of thumb” that serve as a guideline however. For example, there is the 10% Rule which means that funders will advance up to 10% of the case’s estimated settlement value. An alternative to this is the 20% Rule, which allows funding up to 20% of what the client would net from the settlement, after attorney’s fees, medical bills, etc.
Each funding company charges fees in different ways – based on daily, monthly, or semi-annual periods. Others even charge a flat fee regardless of when the case is resolved. However, in the majority of lawsuit funding contracts, the repayment is generally calculated one of two ways – with either a simple rate or a compounding rate.
With a simple rate, the fees are the same for each period of use, usually six months. While compounding rates calculate the fee on the previous month’s balance. This means the longer the case takes to settle, the more percentage “use fee” you must pay back the funder.
For example, an advance of $10,000 with an 18% simple fee every six months would cost $1,800 for every six months it takes the case to resolve. If the case is resolved after six months but before a year, the repayment would be $13,600. If after twelve but before eighteen months, simply add another $1,800 or $15,400. Essentially, the payoff is calculated by taking the original advance ($10,000) advance, multiplying how many six-month periods by the increase amount ($1,800) and adding that amount to the total.
The other way funding companies charge use fees is through a compounding rate. Taking the example above, the same $10,000 is calculated at 3% per month (a common rate), which would make the first six-month repayment $11,941. The twelve to eighteen-month repayment is $17,024.
While there are companies who charge a lesser monthly rate, the savings is marginal and short lived as the rate must be calculated on the previous month’s balance. Still, a compounding monthly rate does have its uses but overall, a simple interest rate structure is the safer of the given alternatives.
Plaintiffs who need cash now but who have little to no liquid assets are relieved to know that their lawsuit is in fact, partially liquid. Most clients will search the internet to shop rates or to learn more about the process. Others will ask their attorneys for advice.
Some lawyers take the position that a lawsuit funding deal is outside the scope of their representation of a personal injury client. Therefore, they do not want to spend the time reviewing and advising their clients on lawsuit funding contracts. This is understandable. Yet, clients still need money, and most state ethics rules prohibit attorneys from advancing money to their clients prior to settlement.
Attorneys who embrace lawsuit funding are able to utilize its positive aspects to enhance their practice. They are also able to control the process so that it doesn’t hinder settlement later on.
There is a way plaintiff’s counsel can even get more involved, and that is by referring the client directly to a funding company he can trust. By working with one company exclusively, the attorney can familiarize himself with only one contract, control the funding process from start to finish, and be in a better position to negotiate a reduction if something unforeseen throws a wrench in settlement negotiations. They can also utilize lawsuit funding for surgical procedures when their client has no available insurance coverage. The treatment is needed and just so happens to increase the case’s settlement value.
Embracing lawsuit funding means you understand what lawsuit funding brings to the table, what it costs, and utilizing it to enhance your personal injury practice.
For more information on how lawsuit funding can help your practice, visit us at http://fairratefunding.com or call us at 888-964-2224.
Thank you for your interest in the settlement funding business.