Lawsuit funding, also known as settlement funding or lawsuit loans, are financial transactions in which the plaintiff of a lawsuit sells part of the future proceeds of the case, if there are any. The plaintiff assigns by contract a portion of his/her property rights in the future proceeds and the “funder” offers immediate cash as payment for the transfer. One provision in the agreement is that the contract be placed in the file and paid when the case is settled. Essentially the contract is a “lien” against the future settlement just as an attorney’s contingency fee is also a lien on the file. The idea is that all parties with a rightful claim on some of the settlement be made whole prior to the plaintiff receiving the remainder.
A lawsuit loan is only one potential lien that could be placed in the file jacket of a lawsuit. Below are a few examples of liens contained in litigation files.
1. Attorney’s Fee – Most personal injury plaintiffs represent clients on a contingency fee basis. That is, the attorney is only compensated if the lawsuit is successful. The fee usually ranges from 33% to 40% of the total recovery. This fee represents the first lien on the file and will be the first lien paid by plaintiff’s counsel in most circumstances.
2. Letters of Protection – Similar to the above, letters of protection are usually found in personal injury actions where there is extensive medical treatment. The plaintiff’s attorney will write a “letter of protection” to a doctor who will then provide medical treatment to their client, if needed. The attorney will “protect” the cost of the treatment with the proceeds of the settlement. While it is not certain how letters of protection relate to other liens, such as lawsuit funding contracts, in terms of priority, lawsuit funding companies use the amount of medical treatment and outstanding medical bills as they assess investment risk during underwriting. Often, letters of protection are negotiated down at the time of settlement, particularly if the attorney and medical provider routinely represent/treat the same individuals or the amount due and owing could inhibit settlement negotiations with the defendant’s insurer.
3. Federal Tax Liens – By law, the presence of Federal Tax Liens take priority over other liens in the file. These liens may attach to the proceeds of the lawsuit and possibly directly with the IRS as payment. In some instances, lawyers may be able to compromise these amounts in an effort to induce the plaintiff to accept a settlement offer. Nevertheless, tax liens are factored into the lawsuit funding underwriting process when necessary.
4. Child Support – Most state laws require child support liens be paid out of any lawsuit settlement. Many states mandate that child support be paid before other claims to the proceeds. In other words, a child support claim is superior to a lawsuit funding claim on the proceeds. The reason for this sequence is to protect the welfare of children first. Lawsuit funding operations use the presence of child support liens as a determining factor in whether lawsuit funding will be offered and for how much.
These and all other liens could possibly hinder settlement negotiations because a plaintiff may realize most of his potential settlement will be used to pay creditors. With no incentive to settle the lawsuit, attorneys may find themselves faced with the possibility of having to try the case before a judge and jury at considerable cost.
As a general rule, the lawsuit cash advance business is concerned with liens which take priority over lawsuit funding as a matter of law. Yet the total amount of claims against the proceeds is always considered with regard to the amount of funding available. The consideration of these liens is where lawsuit funding underwriters earn their keep as the appropriate amount of lawsuit funding is always in the best interest of all the parties involved in the transaction.
Thank you for your interest in the pre-settlement funding business.
