All About Settlement Loans
Settlement Loans are financial transactions in which money is advanced to a plaintiffs or plaintiffs’ lawyers prior to settlement. In exchange, plaintiffs and their attorneys repay the “lawsuit lender” a portion of the settlement when the case is resolved. Because settlement loan repayment is calculated with a percentage rate, these transactions are often referred to as “settlement loans”.
Most state ethics ruled prohibit attorneys advancing money to their clients. The settlement loan industry aimed to fill this need. Since then, critics have emerged citing “oppressive” terms as a reason for lawsuit funding regulation. Clearly, there is a need in the marketplace for these transactions. Below, we discuss the elements of a settlement loan transaction; why they are a welcomed addition to the legal landscape; how they are built; why they are a thorn in the side of legal reformers; and remark about the current state of the settlement loan business.
Plaintiff Cash Flow Problems and the Need for Settlement Loans
Settlement loans are important to personal injury plaintiffs who are unable to work because of their accidents. Because their earning capacity is negatively affected due to injury, plaintiffs are often unable to pay monthly expenses. Settlement loans offer immediate cash to ease the financial strain.
Personal injury defendants are mostly represented by well funded insurance companies. The company’s business model is to pay claims against their insured. The business obviously earns more profit if it can pay less in claims. Insurance companies therefore have an incentive to be thorough when investigating claims. This thoroughness takes time however, which can leave many plaintiffs anxiously waiting their recovery.
While cases can drag on for years, plaintiffs need money now to pay expenses. Some find themselves accepting “low-ball” settlement offers just to ease the pain. Settlement loans are designed to give plaintiffs the staying power so their attorneys can generate a fair outcome.
Alternatives to Using Settlement Loans
Settlement loans are simply one possible relief source for financially troubled plaintiffs. In fact, most plaintiffs seek lawsuit loans only after exhausting other alternatives. Plaintiffs often ask friends and family for help; cash out of retirement plans, take equity lines of credit out on their homes, sell unneeded or unwanted possessions or any other means to secure money to help.
Settlement Loan – Non-Restrictive Use
There are absolutely no restrictions on the use of settlement loan proceeds. Although many plaintiffs use them to pay living expenses, others utilize this unique characteristic to help their case.
One example is to use settlement loan cash to pay for expert fees and testimony at deposition or trial.
Another example might be to pay for medical treatment when insurance coverage is unavailable. Known as surgical lawsuit loans, plaintiffs can use settlement loan companies to pay medical providers directly for medical treatment. Because more treatment normally makes a personal injury lawsuit more valuable, surgical lawsuit loans have the added benefit of increasing settlement value.
Any use of lawsuit loans that helps plaintiffs financially is a worthwhile use of settlement funding.
Understanding the Settlement Loan Transaction
Settlement loan transactions are contractual agreements which advance money to plaintiffs prior to settlement. In exchange, plaintiffs pledge a portion of the future proceeds of the lawsuit, if any. The transaction calculates the repayment amount based upon how long the case lasts and whether a recovery is achieved.
A typical loan has some basic requirements. One such requirement is that the principal and interest must be repaid. If the amounts are not repaid, the borrower defaults on the agreement. It is this very characteristic that differentiates a regular loan vs. a settlement loan.
Settlement loans are not repaid under all circumstances. The repayment is conditioned on a successful recovery, not the ability of the plaintiff to repay. In this sense, a settlement loan is not a loan at all.
Instead, settlement loans are a purchase of the future proceeds of a claim or case. If there are no proceeds (i.e. the case loses), the purchased proceeds are worthless, and the advance is not repaid. At that point, the lawsuit settlement loan company simply takes the loss as an ordinary part of business and the parties go their separate ways, not obligated any further.
This integral part of a settlement loan is what allows lawsuit funding companies to stay in business. It is the very essence of the transaction and its importance cannot be overemphasized.
Attorney Participation with Processing and Repayment
Settlement loans require the participation and cooperation of plaintiff’s attorney. Once a plaintiff applies for funding, the legal funding company company requests important documents from the attorney’s office. The attorney, or support staff, compile the documents and forward same to the company. Once approved, counsel must acknowledge a written agreement and agree to repay the advance pursuant to the terms of the contract. The relationship between the settlement loan company and the attorney is an important one. In fact, having an attorney is mandatory for almost all lawsuit funding deals.
Settlement Loan Terms, Rates, Fees and Costs
Settlement loans can be costly. Evaluating the cost of lawsuit loans is subjective. On paper, cost is determined by the percentage rate used in calculating a “use fee”, the duration of the case, and any other processing fees added to the contract. The settlement funding is not repaid, in part or in full, until the case is resolved, or another company purchases the previous funder’s position.
Settlement Loan Rates
Lawsuit funding companies generally use two different types of rate calculation. First, the contract amount is multiplied by a monthly percentage rate. The next month, the percentage rate is calculated on the previous months balance. In other words, the rate “compounds”.
The second type of charge is a “simple interest” calculation where the charge is always calculated on the original contract amount and added to the balance every six months.
Payoffs for the compounding rate structure are generally less in the first six months. Afterwards, the differences in these two lawsuit loan repayment types is insignificant if the advance is repaid within two years. After two years, compounding repayment amounts are generally larger than simple interest calculations.
Lawsuit loan payoffs are calculated in 6 month periods. In other words, if a case is settled anytime within a six month period, the payoff remains constant. For example, a $10,000 settlement loan agreement is signed on January 1, 2020. The agreement calls for repayment of 18% every six months – simple interest. The case is settled in September. The repayment is $13,600 because the case was resolved in the second 6 month “bucket”. The payoff figure is NOT calculated to the day or even month. The figure only changes every 6 months.
It is also important to note that settlement loans can not be paid off over time like traditional loans. In order for the contract to be followed, the repayment amount must be paid in full, either from the proceeds of the case, the plaintiff himself, or another settlement funding company who buys out the previous advance.
Criticisms of Settlement Loans
There is no shortage of criticism of the lawsuit funding industry. One would think the source of this criticism would be disgruntled customers would conveniently forget they entered into a contract and at the time of settlement, did not want to repay what was agreed to. Although this does happen, this scenario does not paint the entire picture.
The truth is the majority of settlement loan criticism comes from the defense industry. Insurance companies, or their advocates like the Institute for Legal Reform, attack lawsuit funding because it seeks to level the financial playing field where these companies have a competitive advantage. Deep pocketed insurers understand they have leverage on a plaintiff who is unable to pay his/her bills. If the case is delayed, caused by legal tactics or a crowded docket, the pressure increases often forcing the plaintiff to accept less than would otherwise be available simply because they have an immediate need for cash.
Fairness of Terms
These parties attack lawsuit settlement loans as unfair because they are more costly than traditional loans. It does not matter to them these are different types of transactions. Critics understand that if a settlement loan is considered a traditional loan, there would be very little profit to be made and most, if not all, lawsuit funding companies would cease operations. They are not at all concerned with “fairness”. They are only concerned protecting their edge.
Thankfully, lawsuit funding client actions speak to the legitimacy of the settlement loan business. If there was no need for the service, there would be no business. And if the service wasn’t working as intended, critics would have no reason to criticize.
Settlement Loan Advocates
Settlement loans are a legitimate business in the legitimate free market. Those providing this service can point to the overwhelming success of their businesses as illustration. Simply put, if there was no legitimate need for cash liquidity for litigants, plaintiffs would not be entering into lawsuit loans. From this perspective, the only people who should be complaining, are those using the service and are unsatisfied.
Yet, as mentioned above, most opposition comes from insurers who have historically placed the blame of increasing personal injury claims, not on the overwhelming increase of motorists onto the roadways, but on fraudulent claimants and sleazy personal injury lawyers. Most can see through this ruse.
Lawsuit Loan Companies Seek Guidance
Several years ago, a group of lawsuit funding companies approached then New York State governor, Eliot Spitzer, to research the viability of settlement loans and create guidelines from which lawsuit loan providers can draft their agreements. These guidelines suggest all settlement loan contracts contain a disclosure statement that:
- States the total amount to be advanced to the consumer;
- Itemizes one-time fees, broken out item by item (e.g. application, processing, attorney review, broker, etc.);
- States the percentage fee or rate of return, stated on an annualized basis, including frequency of compounding;
- States the total amount to be repaid by the consumer, broken out by six month intervals, carried forward to 36 months, and including all fees as well as any minimum required payment amount.
The guidelines also allow the client to rescind the agreement 5 days from the date of execution without penalty.
Settlement loan proponents offer these guidelines as proof of their intention to help injured and other plaintiffs in an honest way. They also refute critic’s assertions that lawsuit loan terms are unfair. If the terms of the deal are outlined clearly, then only a participant is in a position to deem the terms are unfair. At that point, they simply will not enter into the agreement. Critics (insurance companies) can claim financial duress causes unsuspecting parties to enter into settlement loans. Yet, as stated previously, they are the beneficiaries of that same financial strain.
Current State of the Settlement Loan Business
Clients’ needs are ever changing. The settlement loan industry changes along with them. For example, lawsuit loans were originally offered to personal injury plaintiffs. Now, firms are offering lawsuit funding to personal injury lawyers for ordinary auto accidents and other traditional personal injury claims, and also for complex mass tort actions such as trans-vaginal mesh cases and defective hip implant litigation. Larger law firms use settlement loans to fund their overhead as they pursue claims on behalf of thousands of litigants. As such, settlement loans are a much appreciated cash flow solutions for these firms and their clients.
Settlement Loans in the Courts
When a plaintiff, or his/her attorney, decides they are going to breach a lawsuit funding agreement, a lawsuit normally ensues. Funding companies seek to enforced their rights under the agreement and the lawyer/client argues it is fine for the client to receive the benefit of an advance, but not appropriate for the funding enterprise to obtain the benefit of their bargain. The way this is argued is by attacking the very nature of the agreement itself.
Because most state usury laws limit the amount of interest a lender can charge a borrower, those seeking to avoid repayment argue before the court that settlement funding contracts are in fact traditional loans. As discussed above, traditional loans imply repayment under all circumstances. Settlement loans require repayment only after a successful recovery.
In October, 2018, the Supreme Court of Georgia ruled in Ruth v. Cherokee Funding. Cherokee advanced money to their client, Ruth at 4.99% per month. At the time of settlement, Ruth’s attorneys refused to pay stating the agreement violated certain laws in the state of Georgia. The Georgia Supreme Court found: “The provision of funds under an agreement that imposes only an uncertain and contingent repayment obligation is not a ‘loan’… such a transaction is better characterized as an ‘investment contract.’”
Similarly, in December, 2018, the New York Appellate Court found in Cash4cases v. Burnetti: “Although the interest rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant.”
Many states repeatedly hold that lawsuit funding contracts are not loans in the traditional sense of the term. Others states however, have outlawed the practice of advancing money to litigants. Yet, although lawsuit funding routinely comes under attack, most jurisdictions recognize settlement loans as a legitimate part of the legal landscape.
Types of Cases Which Qualify for Lawsuit Loans
The following types of cases are routinely advanced money prior to settlement.
- Auto Accidents
- Slip/Trip and Fall Cases
- Workers’ Compensation (Workers’ Comp)
- Dog Bites
- FELA (Railroad Workers)
- Jones Act (Maritime Injury)
- Medical Malpractice
- Nursing Home Negligence
- Product Liability
- Wrongful Death
- And more . . .
The type of lawsuit most common to lawsuit settlement loans is the auto accident settlement loan. The likely reason is that liability is easily established in these cases. Premise liability actions such as slip/trip and fall cases, are also routinely funded.
Settlement loan approvals depend on a multitude of factors. These might include: case type, representing attorney’s reputation, availability of documents, available insurance coverage, case status, venue and a host of other factors. Underwriters use this limited information to make decisions on hundreds of files a day.
The only unbreakable requirement is the applicant have an attorney on retainer for the case. Without representation (i.e. plaintiff is pro se), virtually no lawsuit funding company will advance money on a case.
Settlement Loan Assistance
Certainly, settlement loans are an established part of personal injury law and the legal landscape in general. As such, they service a legitimate need in the marketplace. If you have any questions regarding settlement loans, please call us at 888-964-2224. We are here to help.
Use lawsuit loans for any purpose whatsoever. You can pay bills, get medical treatment or use the advance for any other reason. When financial strain forces you to consider accepting less than you deserve, don’t wait – call Fair Rate and let us help you.