What is Pre-Settlement Funding?
Pre-Settlement funding or pre-Settlement financing is a method of providing non-recourse cash advances for injured parties to a lawsuit. In return for the money, the parties sign an agreement obligating them to repay the cash advance, but only under certain favorable conditions. The fact that repayment only takes place under some conditions makes the arrangement advantageous for the injured party or parties.
The most prominent condition of the repayment agreement is that there is no obligation to repay the advance until and unless they receive a sufficiently large sum from either a lawsuit settlement or a court award. If the injured party loses the case or receives insufficient funds to repay the full advance, any excess amount from the advance is immediately forgiven, and need never be repaid.
Because any funder of such non-recourse cash advances necessarily assumes a considerable amount of risk, they are likely to require significantly large fees when events do trigger a repayment.
Given the intricacies of such pre-settlement funding arrangements, injured parties who are thinking about applying for these funds should carefully consider all the legal, ethical, and practical issues involved. They should also give thought to the relatively high cost of repayment, in the event of victory or a beneficial settlement.
When Does Pre-Settlement Funding Make Sense?
In today’s over-crowded courtrooms, even a relatively simple case can require months or even years before a final judgment or a settlement is reached. During this time, of course, the injured party must still pay his or her expenses, which are often increased dramatically by newly incurred medical bills. At the same time, income is often substantially reduced or even eliminated by employability limitations resulting directly or indirectly from the injury or surrounding complications.
In such cases, it is helpful to be working with an attorney who is willing to defer his or her fees with a contingency fee agreement. But all this only reduces the injured party’s roster of expenses. It offers no help for covering food, clothing, utilities, insurance, rent or mortgage, and all the rest of the bills that we all incur simply as a matter of living.
Because accepting pre-settlement financial help can result in the winner of a case paying large fees to the funder, it is wise to delay making this kind of arrangement until more traditional sources of money for living expenses — savings, asset sales, family, and friends — have been explored. In fact, many advisors strongly suggest that people arrange for pre-settlement funding only when all other sources are neither acceptable nor available. However, in cases where these other sources of funds are not an option, legal funding can help provide needed money.
If the decision is made to accept pre-settlement funding, the best advice is to shop around carefully among various sources of these funds before signing an agreement with any of them and to negotiate hard for the lowest possible fees.
Although these fees are set at levels intended to compensate the pre-settlement financier for the risk of offering non-recourse funding, the plain fact is that these funders are unlikely to offer cash advances under any conceivable fee arrangements unless they judge the risk in your case to be acceptable.
How Pre-Settlement Funding Works
Many parties to a lawsuit who seek out pre-settlement funding do so at their attorney’s suggestion. Under his or her guidance, they will normally contact a number of funding sources and shop for the best available deal. Each of these potential funders will ask for documentation regarding the case, up to and including some confidential details. Skilled underwriters will examine and analyze the evidence and arguments on both sides of the case, compare the situation to previous, similar cases with known outcomes, and determine not just the potential of each side prevailing, but the likely size of any award (or settlement) that might be made.
Based on those estimates, the funder may then offer a cash advance to the injured person, specifying the fees and other charges to be collected if and when the money to repay becomes available through a court verdict or out-of-court settlement. In some cases, the funder will suggest a flat fee. In other cases, the contract may call for a monthly fee, sometimes very high, that continues to accrue for as long as the case remains pending.
When the case concludes, the injured party will pay to the funder their share of the recovery, usually directly from the attorney’s settlement account. Under the terms of these contracts, a loss in court usually obviates the need to repay any of the advances. A settlement is likely to trigger a requirement to repay, but — depending on the amount — perhaps not the whole amount. If the injured party wins the case, he or she may still not owe the maximum repayment amount, because the amount due depends primarily on the size of the judgment and any penalties, and sometimes also on the length of time between the date of the cash advance and the date the case concludes. In most cases, the funder’s return is limited by the actual amount recovered by the injured party, which can be less than the funder originally invested.
No matter how the court case turns out, however, everyone who receives money under the terms of a pre-settlement funding agreement gets to keep the entire advance.
Amounts of Pre-Settlement Funding
The amounts a funder will make available to a plaintiff varies a great deal. Naturally, the greater the weight of evidence on the side of the injured party, the more likely a victory in court, the more generous the investment. The nature of the case is an important factor in the calculations.
Regardless of these details, different funders tend to invest different amounts. For example, similarly, situated funding companies may view a claim with good prospects differently. Some companies may offer amounts between $2,500 and $10,000, while larger (or more expensive) companies may be a willing risk as much as $100,000. The expected return and service fees will also vary from one funding company to another.
Legal & Ethical Issues
When determining whether a form of financing is a loan or not, one key determinant is whether the amount must be paid back under all circumstances, or whether repayment is forfeited by the funder under certain difficult-to-predict conditions (such as losing a court case). In legal funding, repayment can be forgiven and the amount must be paid back under only some circumstances. Therefore, this form of funding is not considered to be a loan and is not subject to the same laws as a loan, allowing companies to charge higher fees than lenders.
With legal funding, there is never any open-ended obligation to repay the original amount disbursed. Instead, the person who needs the money is asked to promise to pay the funder according to a specific schedule of amounts due, which depend on the amount of any verdict or settlement.
In general, state bar associations believe that lawyers must not lend money to their own clients, fearful that the lawyer may then be motivated to disregard the client’s best interests. However, in most states, they may recommend pre-settlement firms to their clients.
Author Bio:- “FRA Financial Group Founder Joe RoosEvans is an industry veteran who has built one of the nations’ most successful Independent Marketing Organizations – Financial Resources of America and its affiliated companies, including FRA Financial Group.”
Copyright: UMS International Fz LLCTheme