The Hidden Business of Pre-Settlement Funding
Pre-settlement funding helps financially vulnerable parties who have suffered damages effectively enforce their rights and get the compensation they deserve and desperately need.
The growing pre-settlement funding industry has found itself thrust, sometimes uncomfortably, into the limelight in recent years. Media outlets sound the alarm in stories about high-profile cases where claimants have been the beneficiaries of pre-settlement funding, arguing that the industry engages in predatory lending practices. Meanwhile, state and federal regulators investigate the sector over these claims, while the American Bar Association explores questions over the ethical implications of pre-settlement funding. A lack of public data and a lack of rules requiring disclosure fuels these narratives and skews public perception of pre-settlement funding. Because there is little available data, the cases that come into the public’s eye are the most extreme ones that do not necessarily reflect the industry’s operating standard.
Despite the bad press, the pre-settlement funding industry necessarily fills a niche in the legal market that expands access to legal services by ensuring that claimants in civil cases can effectively enforce their legal rights and get the compensation they deserve.
What is Pre-Settlement Funding?
Pre-settlement funding, which includes things like car accident loans, personal injury loans, and wrongful death loans, is a specific type of non-recourse loan. A non-recourse loan is one that is secured only by specified collateral. With a traditional loan, recourse for non-payment can include the seizure or repossession of any asset. This is not the case with a non-recourse loan. The lender of a non-recourse loan can recoup their expenses after non-payment only by seizing the assigned collateral. In the case of pre-settlement funding, the specified collateral is the final settlement. The amount borrowed plus fees and interest is paid to the lender after settlement. Thus, if a claim fails and a settlement is not reached, the pre-settlement funds’ lender does not see repayment.
Why is Pre-Settlement Funding Necessary?
Sometimes called third-party consumer litigant funding, pre-settlement funding helps damaged parties enforce their legal rights by providing immediate financial help before a settlement comes to fruition. For some injured parties, the value of this immediate help cannot be overstated.
Consider someone living paycheck to paycheck who suffers an injury in a car accident where they were not at fault. Imagine that the injury prevents them from working for some time. While they are recovering, they will not get the paycheck they rely on. On top of this, until a settlement is reached, they will have to absorb all the accident costs. Meanwhile, their regular bills will pile up.
A person in this situation could easily find themselves homeless or unable to put food on the table. Such an individual will be desperate for a settlement. Knowing this, the person negotiating on the other side could easily lowball the injured party and offer a settlement that does not adequately compensate them. The injured party could be forced to accept it. If they are facing eviction, what other options do they have? Waiting for a settlement or trial is not always an option. The pre-settlement funding industry gives such injured parties another option: get enough money to tide them over until a settlement is reached, giving them the compensation they deserve.
How Long Do Lawsuit Settlements Take?
One of the biggest problems a claimant faces when seeking compensation is uncertainty over how long it will take to settle their claim. Whether a case is settled in trial or out of court, this question remains. The answer is even more critical if the damaged party lacks the assets necessary to stay afloat financially while awaiting a settlement. Unfortunately, there is no simple answer. Every claim takes a different amount of time to settle. The following outline shows the typical path that a civil claim takes up to a trial:
- Damaging incident;
- Medical treatment or repairs to fix the damage the incident caused;
- Choosing and hiring a lawyer;
- Lawyer’s investigation of the incident and preparation of claim;
- Lawyer’s submission of the claim to the defendant;
- Negotiations between parties and their counsel;
- If a settlement is not reached in negotiations, filing of a lawsuit;
- More negotiations, mediation, potential settlement; and
- The trial in court.
While some claims can be settled within days or weeks, particularly if the evidence is strong and damages are not severe, this is not always the case. Each of the noted stages of a civil claim can itself take weeks or months.
How Long Will a Case Take if It Goes to Trial?
While the majority of civil claims do not go to trial but rather find settlement out of court, some do end up in court. The resolution of civil claims that go to trial can take a long time. One analysis of nearly 5,500 civil claims that went to trial in the U.S. found an average of 30.2 months between a case’s filing and a trial verdict. This extensive length of time underscores the necessity of pre-settlement funding. After dealing with the costs of an accident, many people cannot stay financially afloat long enough for their case to go to trial, which can be exploited by a defendant.
Who Qualifies for Pre-Settlement Funding?
Any individual who suffers civil damages and seeks compensation for them can qualify for pre-settlement funding. Pre-settlement lenders do not use credit scores, employment history, or held assets to determine funding eligibility. Instead, they look at the damages suffered by a borrower, proof that the borrower is pursuing the claim, and the likelihood of the claim’s success. The lower a claim’s chance of success, the less likely it is that a pre-settlement funding agreement will be financed.
How Much Money Can I Get from Pre-Settlement Funding?
The amount of money available in a pre-settlement funding agreement varies from case to case. Typically, the amount is dependent on what damages exist and the size of the expected settlement. If a settlement is anticipated to be a relatively low amount of money, the pre-settlement funding available will also be low. A claim’s chance of success can also impact the amount of pre-settlement funding available. A survey of 200,000 completed pre-settlement funding agreements showed an average loan amount of $7,000.
What Cases Qualify for Pre-Settlement Funding?
Although pre-settlement funding is often associated with personal injury lawsuits, personal injury claimants are not the only ones who can benefit from it. Pre-injury funding can be helpful to claimants in many other types of cases. The following, a non-exhaustive list of examples, illustrates the wide variety of different cases where individuals can benefit from pre-settlement funding arrangements.
Parties to automobile accident claims can be candidates for pre-settlement funding as they wait for their case to settle. Auto accident claims eligible for pre-settlement funding include:
- Bus accidents,
- Motorcycle accidents,
- Pedestrian accidents,
- Tractor-trailer accidents,
- Bicycle accidents, and
- Car accidents.
Claimants in any of these cases can benefit from and are typically eligible to apply for pre-settlement funding to help make ends meet between the time of their accident and their case’s settlement.
Claimants in personal injury cases often lose their ability to work as they recover from their injury. As a result of this loss, they lose the wages they would otherwise earn during this time. To make up for these wages and other losses incurred while working toward a settlement and recovering from injury, injured parties can turn to pre-settlement funding to make sure their bills are taken care of in the meantime. The types of injury cases eligible for such funding include:
Diffuse axonal brain injury; image by Hellerhoff, via wikimedia.com, CC BY-SA 3.0, no changes.
- Dog bites,
- Birth injuries,
- Injuries from assault and battery,
- Spinal cord injuries,
- Traumatic brain injuries (TBI),
- Premises liability injuries,
- Wrongful death,
- Medical malpractice injuries, and
- Injuries resulting from nursing home negligence.
Injuries arising out of these and many other types of accidents can cause great disruption in the lives of those that suffer from them. As a result, these claimants can benefit from pre-settlement funding.
Pre-settlement funding can be beneficial to claimants who suffer damage due to their use of pharmaceutical drugs. Many drug manufacturers have been held liable by individuals and groups of people for damage caused by their drugs. Among others, some of the pharmaceutical drugs that have been the source of such claims are:
- Pradaxa, and
Any individual who has suffered damages connected with these and other pharmaceutical drugs can apply for pre-settlement funding to help fund their claim while the settlement or litigation process runs its course.
Certain medical devices can cause personal injury and other complications that cause damages to those that use them. Such damages can give rise to legal liability for the medical device manufacturer or medical professional that recommends their use or implants them. Some of the medical devices that have previously caused such damages include:
- Hip replacements,
- Bone grafts,
- Transvaginal mesh,
- Intrauterine devices (IUDs),
- Warming blankets,
- Dialysis fluids, and
- Power morcellators.
Pre-settlement funding can help anyone who suffers damages from the use of these and other medical devices. The funding can help ensure these parties stay ahead of their bills while simultaneously pursuing compensation for damages.
Since learning of the risk associated with concussions, including developing chronic traumatic encephalopathy (CTE), certain sports leagues and associations have been found liable for related damages. The offending sports organizations knew of these risks before going public with their knowledge, failed to inform athletes of the risks properly, and failed to implement safety protocols that would reduce their athletes’ likelihood of developing such injuries. Among others, the organizations in question are:
- National Football League (NFL),
- National Collegiate Athletic Association (NCAA),
- National Hockey League (NHL),
- World Wrestling Entertainment (WWE), and
- Pop Warner.
Athletes who suffer certain injuries while participating in these organizations and, in some cases, their families may be eligible for compensation. While awaiting settlement of their claims, these individuals can benefit from pre-settlement funding.
What to Look for in a Pre-Settlement Funding Agreement
When shopping for a pre-settlement funding agreement, the most important things for a borrower to look at are interest rates, interest types, and fees. These can come in many forms, so borrowers need to read the fine print and understand the agreement they sign. Ideally, a borrower would submit any potential pre-settlement funding agreement to their legal representative before committing to it.
The first thing to consider when assessing a pre-settlement funding agreement is the interest rate. This number will determine the percentage added to the principal for every day the debt is outstanding. Next, a borrower should assess the length of time between each outstanding debt recalculation. Interest to the outstanding amount could be calculated and added daily, monthly, weekly, or annually.
Finally, a borrower should consider the type of interest rate. A fixed (or simple) interest rate accrues at the agreed-upon rate until payment of the debt. On the other hand, a compounding interest rate adds accumulated interest to the principal amount before recalculating the interest. If an interest rate in a pre-settlement funding agreement is compound, a borrower should also consider the interest compound rate. A $10,000 loan with a simple interest rate of 10% per year will cost much less in the long run than a $10,000 loan with a 10% interest rate compounded monthly.
Fees are another potential cost of a pre-settlement funding arrangement. Fees can make a seemingly affordable pre-settlement funding agreement quite expensive in reality. Pre-settlement lenders can charge fees for processing the loan, reviewing the application, applying for the loan, consulting with attorneys, coordinating with attorneys, underwriting, and originating the loan. The number of potential fees is considerable, so it is always important to carefully read and understand a pre-settlement funding agreement before signing it.
Finally, while it is generally the industry standard for a pre-settlement lender to forgive loans in cases where claims are not successful, a borrower should always be wary of and keep an eye out for pre-settlement funding agreements that do not include loan forgiveness in the event of an unsuccessful claim.
Pre-Settlement Funding is Necessary
The pre-settlement funding industry’s “hidden” nature causes misunderstanding in the public eye. The lack of public disclosure and associated lack of public data fuel this misunderstanding as extreme cases make their way into the public eye through popular media. While some bad actors exploit unwitting consumers, pre-settlement funding is an important part of the legal market. Pre-settlement funding helps financially vulnerable parties who have suffered damages effectively enforce their rights and get the compensation they deserve and desperately need.