The Step by Step Process of Lawsuit Settlement Loans

A lawsuit loan is a cash advance against an anticipatory judgment or settlement award. Personal injury lawsuit plaintiffs, with a strong case based upon the factual merits of the case, may qualify for such loans. Care should be taken when considering a lawsuit settlement loan because borrowing against a future settlement or judgment, while helping with immediate financial challenges, may ultimately end up costing borrowers lots of money.

Lawsuit settlement loan advertisements on daytime TV promise plaintiffs they can have their money right away rather than waiting until their personal injury suits settle. Lawsuit lenders market mainly to personal injury plaintiffs in traffic accident, slip and fall, and medical malpractice cases. Some lend money to heirs waiting for settlement of a decedent’s estate or to plaintiffs in discrimination suits.

Lawsuit lending is available in most American jurisdictions, most commonly in personal injury cases but also in commercial disputes, civil rights, and worker compensation cases. Lawsuit lenders advance the cash as a lump sum with no specific account for the borrower.

The Lawsuit Settlement Loan Process

An essential requirement for a lawsuit loan is the cooperation of the applicant’s attorney with the lawsuit lender. Since the lender will have a financial interest in the case they will want all the details before loaning the applicant any money. The lender will seek a copy of the attorney’s case file and an opportunity to discuss the factual and legal specifics with the attorney.

Applicant and attorney must sign an agreement to repay the loan from settlement or judgment proceeds. An attorney who agrees to cooperate with a lawsuit lender becomes a trustee for the lender’s financial interest, committed to making sure the lender gets repaid before the client gets any recovery from the judgment or settlement.

The unsecured loan collateral is the prospective personal injury settlement or jury award. Normally, no other collateral is necessary for the pre-settlement funding. The applicant’s credit rating, good, bad, or none, is not significant so long as the case seems to have enough settlement value to repay the loan.

Insurance underwriters for lawsuit lenders study fact patterns and settlement amounts for similar cases and report their findings. If the lawsuit lenders then decide there is a high probability of settlement at an amount sufficient for repayment, they approve loans normally for a maximum of 10 percent of what they think cases are worth.

If the case loses or fails to settle, the borrower owes nothing. That result is rare as most lenders won’t make a loan unless convinced that the circumstances reasonably assure repayment.

The lender offers a sum of money immediately. In exchange, the plaintiff agrees to pay the lender that sum and a funding fee from the proceeds of the case. Usually the borrower makes no any payments before settling or getting a judgment in the case and then paying the lender off from the proceeds.

The funding fee can run between 2 and 4 percent per month. That rate may seem reasonable, but at annual percentage rates it amounts to of 27 to 60 percent or more. If the lawsuit goes on and on for years, the total payback may double or triple the money borrowed, and the plaintiff borrower may find that repayment of the loan has taken most or even all of the proceeds of the case.

Repaying the Lawsuit Lender

The judgment or the settlement funds repay the loan after other expenses. When the parties settle the case or reach a judgment, certain expenses must come first for payment:

  • The plaintiff attorney’s fee, in personal injury cases typically a third to a half of any amount recovered.
  • Litigation expenses for service of process, court costs, filing fees, etc.
  • Liens and bills for services from medical providers.

With all other expenses paid, the remainder applies to the loan balance.

Plaintiffs who lose their cases or settle for less than what they owe don’t have to repay the pre-settlement funding advance. The lender undertakes this risk, which is a reason such loans cost more than other types.

Borrowers make no payments of any kind until their cases settle or reach judgments, a process usually of many months or several years. Lawsuit loans are not debts reported to the credit bureaus, so they cannot affect borrower credit ratings adversely.