What is pre-settlement funding?
Pre-settlement funding is a cash advance for an individual that has a pending personal injury lawsuit.
If you have been injured in an accident caused by someone else, have an attorney representing you and need cash now, a pre-settlement funding advance may be the solution. Most applicants need cash quickly to cover daily living expenses, a rent or mortgage payment, a car payment or have other emergency cash needs because of the accident.
Unfortunately lawsuits take longer than anyone would like; the legal process is slow and the court system is backed up. The average civil law suit takes approximately 18 months to complete. The defendant’s insurance company may be liable to pay for your medical expenses, lost wages and pain and suffering, but insurance companies have no incentive to pay you quickly. Insurance companies have every incentive to delay, deny and defend your claim. The longer they take to pay you the longer their premiums are collecting investment income and the more pressure they put on you to settle for less. Many plaintiffs need money now because they are out of work and need cash to cover vital living expenses. In many cases, it is part of the insurance company’s strategy to drag the case out, forcing you to accept a low-ball offer because you cannot afford to wait.
The insurance company holds all of the cards; they have unlimited amounts of financial resources, numerous attorneys and abundant time to fight your case. Pre-settlement funding can help you level the playing field against insurance companies by giving you the financial resources you need to hold out for full value of the settlement you deserve.
The Pros & Cons of pre-settlement funding
Whenever making an important decision, we believe you need to consider all of the facts, weigh the positives and negatives of that decision. After reviewing each side of the list, you should be able to make a more informed decision to see if taking a pre-settlement advance is the right idea for you.
- What is the advance for and do I really need it?
- How much of an advance do I want versus how much do I really need? Do I need it all now?
- What will I have to pay back depending on how long the case takes? After 1 year, 2 years, etc.
- Can I get the money I need at a lower rate somewhere else? For example, refinance a home mortgage, a credit card, borrow from a family member, a bank loan, etc.
- What is my case worth today and what could it be worth if I hold out for a year or more?
- If a pre-settlement advance helps “level the playing field” against the insurance company, then pre-settlement funding can become a valuable resource to use.
What does non-recourse mean? Is it a loan?
Pre-settlement funding, sometimes referred to as a “lawsuit loan," is not technically a loan, but rather a non-recourse advance. Non-recourse means that if the case is unsuccessful and you do not receive a settlement, you do not have to repay the funding company anything. If there is no settlement, the money you had been advanced is yours to keep.
A non-recourse advance means that the advance you are granted is backed by your pending lawsuit and not you personally. If your lawsuit is successful, at the conclusion of your case, your law firm will repay the funding company for the advance you took out of the settlement proceeds
How much is my case worth? How much can I sue for?
Your case’s value is determined by three key items: damages, liability and insurance.
Some damages caused by an accident are easily measured in dollars. Injuries require treatment ranging from physical therapy to surgery that is quantified in the form of medical bills. However, you won’t know the exact value of your injuries until you’ve stopped treating and reach maximum medical improvement (MMI). There are two different forms of damages: Physical Damages & Money Damages.
- Physical Damages – injuries caused to your body.
- Money Damages – money lost because of your inability to work as a result of your accident. Also, if your injuries will prevent you from returning to the type of work you had been doing prior to your accident.
Lost wages and loss of future earning potential can be a very large component of your personal injury claim. Wage loss is calculated by multiplying your wages by the amount of time you missed, or are expected to miss, from work as a result of the accident. Additionally, consideration will be given if your injuries will affect your future earning potential.
Other damages such as depression, anxiety, post-traumatic stress, emotional distress, loss of life and limb are more difficult to measure in dollars, but should also be considered.
Liability is important because the defendant should only have to pay when the accident was their fault. It is the plaintiff’s responsibility to prove who was liable for the accident. In some cases liability is clear, such as a rear-end auto accident, but in other cases liability is hard to prove. If liability is hard to prove then estimating the value of the case becomes more difficult because of the elevated risk.
When you sue for damages generally you can only recover up to the insurance limits of the liable party. For example if you have $100,000 in damages from your accident and the insurance limit is only $50,000 you can only recover up to $50,000.
How much money can I be advanced?
Two important factors in estimating the value of a personal injury case are damages and the at-fault party’s insurance policy. The higher the policy limits, the higher the possible value of a case. A funding company will use the level of injury and policy limits to guide the proper amount of funding.
While there generally is no minimum or maximum, most companies will advance up to 10-15% of the estimated value of a case. Simply put, if a company estimates a case to be worth $50,000, the company will typically offer roughly $5,000 in an advance.
How long does it take to get an advance?
After a plaintiff has retained an attorney, has been evaluated by a doctor and begun treatment for their injuries, he or she may submit an application for funding. The company will typically give the plaintiff a call for a brief phone interview (3-5 minutes) and then request case documents from their law firm. Once those documents are received, the underwriting process can begin
The underwriter must analyze several factors of your lawsuit. The first is liability, or who is at fault for the accident. Liability refers to the legal responsibility of one party (defendant) to act a certain way towards another (plaintiff). Next is causation, or the link showing how the defendant’s actions caused your injury and not a prior medical issue or prior accident. Lastly, the underwriter must determine what damages were caused by reviewing medical reports, treatment records, and doctor narratives to provide insight into the severity of the injuries.
If approved, the funding company will ask you to sign a contract or case investment agreement. The money can be wired to a bank account or a check can be sent overnight. In most cases, you can receive the money in 24-48 hours after you apply for the advance.
If approved, how do I get the advance?
After the contract has been signed by the plaintiff and their attorney, a pre-settlement advance may be issued. While methods of delivery vary from company to company, most offer Western Union, Money Gram, a wire transfer into a bank account and also a check can be overnighted via UPS or FedEx. In most cases you can receive the money in 24-48 hours after the initial application.
How much will a pre-settlement advance cost me?
What it costs to borrow against a lawsuit can be a complicated question because there are numerous variables involved. The question most often asked is: “what do you charge?” From our experiences, the better question to ask is if I borrow X what will I have to pay back over certain periods of time. For example, what will I have to pay back after 6 months, 1 year, 2 years, etc.?
Each funding company charges fees in different ways. Some fees are based on daily, monthly, or semi-annual increments; while others charge a flat fee regardless of when the case is resolved.
When comparing different pre-settlement funding offers, it is prudent to ask two questions. The first is the rate. The rate refers to the percentage fee being charged to the amount you are advanced. The second question is for how long a period that rate is for. For example, a funder may charge X% rate each month, while another may charge Y% rate for a 3 month period.
In most cases, there are 2 different methods of calculating the fees. Fees can be charged with either a simple rate or a compounding rate. With a simple rate, the fees are the same for each period of use. While with the compounding rate, the fee becomes larger the longer the advance is outstanding.
- Simple rate: For example, assuming no other fees are involved, if you took an advance of $3,000 and the fee was 18% simple every six months, then the fee would be $540 every six month period until the advance is repaid. If the case was resolved within 1 year the balance owed would be $4,080.00. If the case was still not settled after 1 year, the fee would increase by the same $540.00 for each 6 month period thereafter. The payoff is calculated by taking the original $3,000.00 advance and adding up how many six month periods of $540.00 the advance has been out for.
- Compounding rate: For the same example, but a compounding rate, the fees you are charged would become larger over time. Therefore, if you took an advance of $3,000 and the fee was 18% compounded every six months, the fee would increase each period until the advance was repaid. If the case was resolved within 1 year the balance owed would be $4,177.00. To calculate the payoff, take the original $3,000.00 advance plus a $540.00 fee for the 1st six month period, plus a $637.00 fee for the 2nd six month period. The 2nd period fee is larger because now the 18% fee is on $3,540.00, not the original $3,000.00.
Should I take a large advance now or monthly advances to replace my lost salary?
If you lost your income due to an accident you may wish to replace it for a few months until you return to work. But should you take out a large 1-time advance to get by or borrow in monthly increments?
If you take a large advance now, you will pay fees on the entire balance. However, if you have a large item to pay for such as a car, tuition, or surgery it may be your only option. If you borrow in monthly increments you will pay fees on a smaller balance and save money in the long run.
- For Example*:
If you borrowed $6,000 up front, after 9 months the payback would be roughly $8,649.60.
If you borrowed $1,000/month for 6 months, after 9 months the payback would be roughly $8,001.00.
*The example is for illustrative purposes and is not a guaranteed rate. Rates vary by funding company.
Why do lawsuits take so long to settle?
In our experience, the average personal injury lawsuit takes approximately 18 months to be resolved from the time the accident occurred. Lawsuits are a lengthy process between two parties. The plaintiff wants to get the maximum amount of compensation while the defendant wants to pay as little as possible.
There are generally two routes your personal injury claim can take to a settlement. The claim can either reach a settlement Pre-Litigation or by Litigation.
- Accident occurs
- Seek medical attention
- Consult and retain an attorney
- Attorney makes contact with the at-fault’s insurance provide
- After your treatment is completed, they will attempt to negotiate a settlement.
- If a settlement can be agreed upon, plaintiff signs a release and payment is issued.
- If a settlement cannot be reached, the litigation process begins.
- Discovery begins: documents, photos, etc. will be exchanged.
- Depositions: an interview by opposing counsel about the details surrounding the accident.
- IME: Independent Medical Examination – an independent doctor will review your injuries and treatment to insure the accuracy.
- Mediation and/or Arbitration – meetings between plaintiff & defendant with a 3rd party who attempts to find a settlement.
- Trial – if a settlement cannot be reach, a trial is required. A trial is the final step unless there are grounds for an appeal by either side.
Often the plaintiff who is out of work due to injuries will drain any savings they had while they await their settlement. This gives the upper hand to the defendant, usually an insurance company, with deep pockets. Under the right circumstances, pre-settlement funding can be a tremendous asset for the plaintiff allowing them to level the playing field against the insurance company. A pre-settlement advance buys time for the plaintiff to meet their needs until they are offered a fair settlement.
Can I take multiple advances on my case?
Yes, depending on how your case progresses, many plaintiffs can receive multiple advances on their case. As stated before, most cases will take a year or more before being resolved so as a plaintiff continues to treat for their injuries and potentially has a surgery, value is added to the case. As the value of the case rises and becomes more certain, most funding companies will be willing to make additional advances.
If the funder you originally used is un-able to offer you additional funding, you may contact another funder to see if they can help. If another funder approves you for an advance, they would just have to obtain a payoff letter from your original funder and payoff what is owed. Plaintiffs are not permitted to have multiple funders on their case at the same time.
Alternatives to taking a pre-settlement advance
A pre-settlement advance can be expensive depending on the amount you borrow and the funder company you choose. It is always a good idea to consider alternatives before making your decision.
- Savings: Don’t borrow money until you run out of savings. It doesn’t cost anything to use your savings account!
- Friends and Family: Borrowing from friends and family can be difficult and uncomfortable, but it couldn’t hurt to ask. Let them know your situation and they may be able to help.
- Mortgage: If you own a home, you can refinance your mortgage to get some cash. However, mortgages take a long time and it may be too little too late.
- Home Equity Line of Credit: A home equity line of credit or HELOC allows you to borrow money against the equity in your home. The equity in your home is calculated by subtracting what you owe on your home from the value of your home.
- Personal Loan: Personal loans should not be confused with other short-term borrowings like cash advances or payday loans. Typically a personal loan has a period of 2-5 years with a fixed interest rate between 8.5% - 25% based upon a few factors. Personal loan companies typically require a minimum credit score of 640-750. Your debt usually cannot exceed 45% of your income.
- Credit Card Cash Advance: If you have an emergency, consider taking a cash advance on your credit card. This should only be an option if you need cash in hand. The annual percentage rate on a credit card cash advance averages around 24% plus a 15-30% fee to withdraw the money. If you don’t need cash in hand and just need to buy something, just charge it on your credit card instead of taking a cash advance
What is a “broker”? Is using one a good idea?
A broker is a person who can introduce you to a funding company who may be able to provide you with the advance you are looking for. For the broker’s efforts in helping you complete this transaction, the broker will typically be paid a brokerage or origination fee. That fee is usually either outlined in the funding contract or paid from the funder directly to the broker.
In certain situations, a broker can be an additional expense that may be avoidable. While in other cases, a broker might be an invaluable resource in helping you get the exact type and amount of an advance that you desire. Typically a broker works with multiple funding sources and will present your case to numerous prospective funders until they find you the funding amount you seek. A broker can be very useful because they handle much of the application process for you, while also shopping for the best funding fit for your needs.
When talking with pre-settlement funding companies, it might be wise to ask if the company you are speaking with is a direct funder or a broker on the initial call.
Can I pay back my advance before my case settles?
Yes, you are permitted to repay your advance at any time without penalty. However, some companies do often require a minimum repayment amount. For example, you wanted to repay your advance after 3 months and the fees on your advance are 3% per month, the contract may require a minimum repayment amount of 3,4 or 6 months. It is very important to carefully read and understand the terms and costs of your funding agreement prior to signing it to guard against unpleasant surprises after the fact.
Another factor to consider is that this form of funding is non-recourse and solely dependent on the outcome of your lawsuit. That is important to remember because if for any reason there is no settlement from your case, you are not required to repay the money you had borrowed. So while it may save you some money if you decide to repay the advance early, it may prove to be a bad decision if your case turns out to be unsuccessful and you would have not been responsible to repay the money
What happens if I lose my case?
If your case is unsuccessful, dismissed, denied, etc. and there is no settlement money, then the advance you were given does not need to be re-paid. This type of funding is not a loan, meaning that is not tied to your personal financial obligations. Pre-settlement funding is categorized as a non-recourse advance or an investment because the only collateral considered to approve it are the facts of your case and not your personal credit
Is a pre-settlement advance a good idea? Will it hurt my case?
A pre-settlement advance on your accident is designed to provide plaintiffs with a little cash to get by while their attorney fights for the compensation they deserve. For many people involved in an accident, injuries force them to miss work and thus lose income. Also, often accidents result in car repair costs, medical bills, transportation expenses to see a doctor or rehab facility and others.
If you are struggling to pay your bills, buy groceries or take care of your family because your accident has really screwed up your life, taking an advance on your case can be a life saver. There is no denying that, depending on the company you choose to use, a pre-settlement advance can be expensive. However, it is important to consider that if you were forced to settle your case pre-maturely because you cannot afford to wait 1-2 years for the full value, that loss will be far greater than the cost of taking an advance to keep you above water while you wait.
Taking an advance will not hurt your case or personal finances in anyway. The fact that you have received an advance is not reported to any credit rating agencies.
How much of my settlement do I get?
After you agree to settle your case for an amount, the check will be sent to you attorney’s office. After receiving the check the attorney will deposit it into their Trust of Escrow account. Next, it is the attorney’s responsibility to access what bills, costs and liens there are on your case that need to be repaid. There is a pecking order on which items are repaid first before you can receive your portion of the settlement.
- 1st Attorney’s fee & costs – fees are typically 33.3% but could be anywhere between 25%-45%, plus costs incurred in furthering your case.
- 2nd State & Federal liens – these could be if you owe child support, un-paid taxes, etc.
- 3rd Medical Bills – depending on the state your accident occurred and if you had insurance or not, there may be medical bills that need to be re-paid out of your settlement.
- 4th Pre-settlement funding – if you have received an advance on your case, your attorney will repay that for you. After these items are satisfied, the remaining money from your settlement can be distributed to you.
Why wasn’t my application for pre-settlement funding approved?
There are many factors that are considered when evaluating your case for an advance. The 3 primary factors considered are Damages, Liability & Insurance.
- Damages – this is what injuries you were caused because of this accident, but also can be income you lost because of having to miss work or being fired.
- Liability - this is determining who is at-fault for your accident. It is also possible that each party involved is partially at fault for the accident in some form of a split.
- Insurance – in most cases the most money you can hope to receive from your settlement will depend on the amount of insurance the at-fault party has. It is possible for some cases to receive more than the insurance policy limits, but not common.
If any of these factors are not satisfactory, your application for funding may be denied. Other reasons could be:
- Pre-existing injuries – this is if you have had prior accidents that caused similar injuries and the new accident exacerbated those conditions.
- Prior-funding – you may be denied for an advance because you have received funding in the past and the amount you owe is too large for a new company to payoff for you. You are not permitted to have more than 1 company advance you money on your case at a time. That means that if you have received funding in the past and apply with a new company, that company must first pay-off your prior advance before giving you a new advance.