Lawsuit funding is the process of advancing money to plaintiffs in return for a portion of the proceeds of their lawsuit. The money can be used to fray the costs of litigation or to pay for daily expenses while the matter is litigated. Below are the top 5 things applicants should know when applying for lawsuit settlement loans.
1. Settlement Funding transactions are NOT loans.
Settlement funding is the process of of selling a portion of the future proceeds of a lawsuit in return for immediate cash. Although sometimes referred to as lawsuit loans or settlement loans, those labels do not accurately reflect the structure of the majority of lawsuit funding transactions that occur each and every day.
A large contributor to this confusion is the use of percentages to calculate the future repayment terms. Settlement lenders compete with each other for the best cases and often times, the issue comes down to price. As such, varying percentage rates are charged for different types of cases. But because percentage rates are also used when calculating traditional loans, people often lump both types of transactions together.
In reality however, the pre settlement funding deal is a transfer of property rights in future proceeds. If there are no future proceeds (the lawsuit is lost), then there is no payment to the advancing party (legal funding company). Because repayment is not guaranteed, the deal is considered “non-recourse” which means the advancing party loses its investment.
Contrast this fact to a loan, which implies repayment under ALL circumstances, and it is easy to see the difference.
2. Lawsuit Funding is one of many liquidity options.
Settlement loan transactions involve plaintiffs and lawsuit funding businesses. The plaintiff receives immediate liquidity in exchange for a predetermined amount of lawsuit proceeds, if the case is successful. They are structured as a sale of future proceeds and are only one of many available liquidity options litigants may have at any given time.
No one could deny that the sale of any asset would be an opportunity to meet immediate financial needs. Litigants could sell off cars, clothes, jewelry, lawnmowers or anything else (including a lawsuit) to meet this need.
3. Settlement Loans can be used at the client’s discretion.
The use of cash advanced on a pending lawsuit is not restricted in any way whatsoever. The only limit on its use is the clients’ imagination. We regularly hear accounts of lawsuit cash advance money being used for daily living expenses, rent, mortgage payments, utilities, food, and car payments. But we also hear of clients using settlement funding to pursue other financial opportunities such as starting a business or investing the cash in another money making venture.
4. Lawsuit Funding cost is subjective.
Much has been written about the “fairness” of litigation finance pricing structures and how contract terms are oppressive. Such blanket statements are dangerous since settlement funding is an industry whose sole purpose is to help litigants level the economic playing field with insurance companies. These companies hold an obvious financial advantage against an individual litigant who may be injured and unable to meet his/her immediate financial obligations.
Further, cost is a subjective concept. Consider an example where a litigant is about to get his car repossessed if he cannot make the payment. What is the cost to this person? What if he used the vehicle in his business and if the car was lost, he would suffer more economic loss in the form of lost money he otherwise could have earned? What if the use of the car allowed him to make $10,000 and cost him only $1,000 in use fees on the settlement funding contract? Would the terms of the agreement, which allowed him to earn this money, be unfair in this scenario?
This type of analysis should be left to those who are best able to make this determination – the parties to the transaction themselves. Almost all contracts outline the repayment terms in a clear manner so that there is no confusion when the lawsuit reaches a settlement or is otherwise concluded. The costs can be weighed and an informed decision made.
5. The Legal Loan process is quicker than most financial transactions.
The speed in which a lawsuit funding transaction can be processed is one of the main reasons why people choose their lawsuit as an asset to sell in an effort to meet immediate financial needs. The settlement loan business has evolved to the point where a case can progress from application to closing in as little as 12 hours in certain circumstances. Although 12 hour processing is not the norm, clients can expect to have literally thousands of dollars in their bank account in only a few short days. Contrast this to the selling of other assets in newspapers, on bulletin boards or online marketplaces.
Applicants can use the above information to better understand the case funding process and to clarify some misconceptions regarding the funding business. Understanding the relevant concepts can aid the applicant is sifting through the nuances of the business. Thank you for your interest in settlement funding.
