We are often asked whether pre-settlement loans are safe. Considering all the opinions available, we are not surprised plaintiffs are concerned.
In this article, we breakdown why we feel plaintiffs have these concerns and answer them in detail. If after reading below, you still have questions, please contact us directly if you feel we left anything out of the discussion or need any more clarification.
We want you to have all the available facts so that if you are considering a pre-settlement loan, also known as a lawsuit loan, you will be considering it with eyes wide open.
What is a Safe Pre-Settlement Loan?
Pre-settlement loans are financial transactions in which plaintiffs sell a portion of the future proceeds of a lawsuit. Sometimes referred to as “lawsuit loans”, there are some misconceptions circling around the topic because these transactions are not loans in the traditional sense. Instead, because the plaintiff actually assigns a portion of their interest in the case to a lawsuit loan “lender”, if the lawsuit is unsuccessful for any reason, the advance is not repaid and plaintiff has no other obligation.
Thus, a safe pre-settlement loan is one that only exposes a plaintiff to repayment if the case is won.
For more information of the safety features of lawsuit loans, visit this article discussing the truth about lawsuit loans.
How do Pre-settlement Loans Differ from Traditional Financing?
Evaluating whether pre-settlement loans are safe means examining the difference between traditional loans and lawsuit settlement loans.
Traditional loans normally imply repayment at some point in the future. The duration and/or terms of the traditional loan may differ greatly. But the main idea in traditional loans is that the principal and interest is repaid at some point in its entirety.
Traditional loans are sometimes “secured” by collateral, in which the debtor (person obtaining the loan) must pledge in order for the deal to occur. Likewise, lawsuit settlement funding is “backed” by the plaintiff’s claim in the lawsuit. The difference lies in how the two types of value are attached. Collateral is pledged if the traditional loan is not repaid. In this event, collateral will be transferred to the lender according to the terms of the agreement.
Conversely, the lawsuit funding contract is only pledged as a potential lien on the future proceeds of the case. If there is no recovery, then there is no repayment. Essentially settlement loans differ from traditional loans because they’re ONLY repaid if the case is successful. While traditional loans are promises to pay under all circumstances, settlement loans are contingent upon a successful outcome. It is because of this difference; lawsuit loan businesses are able to charge enough to offer this valuable financial service to the public.
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Why are These Differences Important?
The importance of these differences lies in the availability and features of these specialty financial products.
First, because lawsuit loans are not credit transactions (loans), the past credit history is irrelevant to the lawsuit funding company. As stated above, the lawsuit loan contract assigns a portion of the lawsuit. A pre-settlement loan is safe to plaintiffs because the company cannot attach any other assets if the case is unsuccessfully resolved. In such an event, the property purchased by the lawsuit funding company expires worthless. It is sort of like buying a share of stock of a company that goes out of business. You still own the share, but it’s not worth anything. In other words, there is no way a pre-settlement loan can leave you in debt.
The second pre-settlement loan safety feature is that there are no restrictions on the use of the money. We often refer to lawsuit loans as “the client’s money”. This is true because it’s your case so you can decide how to use your cash. Some plaintiffs use the money to pay for medical treatment, some use it to catch up on bills. The point is that no one should tell you how to spend your money. It’s your money!
Simply put, lawsuit loans provide plaintiffs the flexibility to respond to their specific situation as they see fit. They are different from traditional loans because they are different and because of this, they provide a much-needed lifeline if someone chooses to use it.
Opinions Vary – Lawsuit Loan Safety Criticism and Response
Critics often include insurers who blame lawsuit funding companies for an increase in lawsuits (they use this argument for everything), call the lawsuit loan industry unsafe and predatory and cite the difficulty settling otherwise resolvable cases. Because lawsuit settlement loans seek to level the legal playing field between well financed insurers and injured victims, it is not surprising these companies oppose this type of financing. Settlement loans are safe for plaintiffs because, when used properly, they can prevent financial strain from turning into a forced acceptance of “low-ball” settlement offers by insurers who can afford to play the waiting game.
Lawsuit loan supporters state the contract terms speak for themselves. In fact, the New York Attorney General published “best practices” for the lawsuit loan industry almost 15 years ago. Almost all litigation financing companies follow these practices. Further, claims of an increase in cases and difficulty in settling existing claims are simply without merit.
The truth is that pre-settlement loans are safe for plaintiffs because they provide a market that is otherwise not available to plaintiffs, mostly who are injured victims from someone else’s negligence. Freedom to choose an individual financial decision should not be decided by bureaucrats who are not involved but by the parties themselves, who are in the best position to assess risk and act accordingly. Simply put, it is up to the individual to determine if a pre-settlement loan is safe for him/her to use.
For More Information on the Safety of Lawsuit Settlement Loans
You are welcome to contact us anytime to discuss your lawsuit funding options. If you have any concerns as to the safety of lawsuit loans or effects of entering into one of these transactions, we can answer any questions you might have. We are here to help and are at your service.
If you feel you want to consider a settlement loan or consider whether settlement loans are safe for your specific situation, apply today to find out if you qualify.