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What Are Pre-Settlement Loans?

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  • Written By: J. D. Kenrich
  • Edited By: A. Joseph
  • Last Modified Date: 12 November 2016
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Pre-settlement loans are a method used by plaintiffs in litigation to obtain the money they need before the conclusion of their lawsuit. These agreements give plaintiffs the opportunity to receive cash advances in anticipation of either settlement of the lawsuit or victory at trial. This type of arrangement, often referred to as a lawsuit loan, is generally of a non-recourse nature, meaning that a plaintiff who fails to settle or win the case will not be required to repay the funds previously advanced by the lender. Should the litigant prevail, the agreed-upon percentage of the financial award must be paid, as well as any fees assessed by the lender pursuant to the contract.

Personal injury matters are the predominant type of lawsuit for which pre-settlement loans are made. The frequently lengthy and expensive process of such litigation commonly leaves plaintiffs in difficult financial circumstances while their matter is pending in the courts, particularly if they are unable to work. In such cases, plaintiffs might decide to contact a lawsuit funding company, which will in turn solicit detailed information from the loan applicant's attorney regarding the claims being made, the available evidence in support of those claims and their estimated monetary value. After the lender completes a detailed examination of the merits of the litigation, an acceptable loan amount will be determined, along with detailed contract terms and associated fees.

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The terms of pre-settlement loans often vary significantly, depending on the nature of the litigation, the prospects of achieving a favorable outcome and the lender's assessment of potential award value. The non-recourse nature of these contracts requires lenders to assume a substantial amount of risk, a fact that is reflected in the substantial transaction fees that generally accompany these loans. Some pre-settlement loans are made based on an up-front fee schedule, but other agreements assess fees on a periodic basis from the date of the advance until the date of loan repayment to compensate for matters resulting in protracted litigation. Certain lenders offer to advance only relatively small percentages of anticipated award amounts, and others are willing to provide significantly larger loans based on the perceived strength of the litigant's claims.

It is not uncommon for pre-settlement loans to be considered an option of last resort for cash-strapped plaintiffs struggling to stay afloat, because of their very costly nature. In certain jurisdictions, there are additional legal and ethical considerations that might prompt further caution on the part of potential borrowers. Some attorneys are reluctant or unwilling to participate in a lender's case assessment process, severely decreasing their client's chances of securing an advance. Pre-settlement contracts of this type also must be carefully drafted to define the transferred monies not as loans but rather as cash advances made in exchange for a percentage of any potential future financial award. In this manner, the extremely high fees charged pursuant to these contracts can escape characterization as the type of usurious interest charge that is often prohibited by law.

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bethj
Post 1

Pre-settlement funds provide financing to help you pay for legal fees while your lawsuit is active. You can also use this money to pay monthly household bills, rent, transportation costs, and other expenses.

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