Pre-settlement funding can serve as a critical lifeline to a plaintiff involved in lengthy litigation. Lawsuit loans come with interest, and in a lengthy lawsuit a plaintiff could lose out on much or all their settlement and so there are numerous factors to consider if pre-settlement funding is right for you.

The National Law Review (NLR), interviewed Mark Berookim (MB), a principal and co-founder of High Rise Financial LLC, a multi-state legal funding company about issues to consider if you’re thinking about taking out a lawsuit loan and what it could mean for your settlement and finances. The NLR thanks Mark for his insights and opinions.

NLR:  Can you explain the difference between pre-settlement funding, lawsuit loans, settlement loans, and cash advances?

MB:  The terms “lawsuit loans,” “settlement loans,” and “cash advances” are often used synonymously with “pre-settlement funding” in the industry to refer to money provided to plaintiffs during litigation. In pre-settlement funding[, if the plaintiff loses their case, they don’t have to pay the financing company back. The preferred term for our industry is pre-settlement funding for a variety of reasons, but a lot of people call it a “Loan” and the terms are often used interchangeably.

Pre-settlement funding is essentially a cash advance on your anticipated settlement or court award. Repayment for the lawsuit loan comes directly out of your lawsuit compensation package rather than your bank account, and you owe nothing if you end up losing your lawsuit. It’s a way of getting a portion of any eventual compensation in the here-and-now while your attorney works toward an appropriate settlement. Lawsuit loans or pre-settlement funding don’t need to be repaid if you lose your case, but lawsuit loans do need to be repaid with interest if you win.

For lawsuit loans, you must have an attorney representing your case and if you’re in need of money, especially during a lawsuit, make sure you’ve exhausted other options before taking on additional debt.

NLR:  What is the benefit of choosing pre-settlement funding over other lawsuit funding options?

MB:  Pre-settlement funding can be a good choice for people in the middle of litigation primarily because it is recourse-free. Meaning, that the lawsuit funding company cannot pursue loan repayment from your bank account. Instead, you repay the lawsuit loan out of your settlement or compensation package. If you do not win your lawsuit, you don’t have to pay back the pre-settlement funding. And while lawsuit loans don’t need to be repaid if you lose your case, lawsuit loans do need to be repaid if you win your case and they do come with interest.  A plaintiff could lose out on much or all of their settlement or compensation package, so it is an important decision that needs to involve your attorney.

Over $100 million in lawsuit funding is issued each year,  but the legal funding industry is not uniformly regulated. All legal funding companies face hard limits on how much capital they can place at risk with any single case.

Generally, legal funding companies will advance you around 10% of the value of your potential settlement. For instance, if you were expecting a settlement of $100,000, the maximum amount of your potential lawsuit loan in this situation would be $10,000. The typical range financial institutions will offer you is 5% up to a 15% loan of the value ratio of your anticipated settlement as a lawsuit loan. 

NLR:  What does it mean for a loan to be "recourse free"?

MB:  “Recourse” is a term that refers to the ability of a funding company to pursue repayment of a loan. Since pre-settlement funding is non-recourse in nature, as it is a cash advance based on an estimated future lawsuit settlement. The repayment is tied to your projected compensation or settlement package, so the funding company will get an agreed-upon portion of your settlement or jury award while you keep the rest. In cases where the compensation package is more than the amount agreed to be paid to the finance company, your lawyer repays the lawsuit loan on your behalf before paying the remainder of any settlement to you.

A recourse loan is a loan where the lender can continue to ask for payment even after taking the collateral associated with the loan if the collateral does not satisfy the total loan value. If you lose your lawsuit and receive no compensation, you don’t have to pay the funding company back. If your lawsuit’s compensation package is smaller than the agreed-upon loan repayment amount, the funding company will receive your compensation package or your settlement and you keep the pre-settlement funding you already received.

Lawsuit loans come with interest, and while they don’t need to be repaid if you lose your case, they do if you win, so they are important decisions involving your attorney.

NLR:  How do pre-settlement loans work?

NB:  The pre-settlement loan starts with the application process. A plaintiff in an ongoing lawsuit can apply for pre-settlement funding, providing the details of their claim and contact information for their attorney. The underwriters at the pre-settlement funding company then examine the details of the lawsuit and decide how much funding the company can provide.

Lawsuit funding companies can often estimate the size of your settlement based on the defendant’s insurance policy and your application. If the size of an applicable insurance policy is unknown, then your state’s minimum coverage laws for the relevant incident frequently can be used as a reference point.

While you might want to take out as much as you can with a lawsuit loan, legitimate legal funding companies discourage plaintiffs from borrowing too much.

Once you sign the funding agreement, the money is yours to do with as you need, unlike medical liens. There are no restrictions on how to spend pre-settlement funding (though investing it would make it subject to taxes).

If you have received compensation and once your lawsuit is over, your attorney sends a check to the pre-settlement funding company for the agreed-upon repayment amount out of your compensation package, settlement, or court award. If you lose your case, the risk is on the funding company instead of on you, and you don’t have to repay the loan back if you lose your case. Though you do have to repay the loan if you win, and it is an interest-bearing loan.

NLR:  You mentioned medical liens, what are medical liens and how do they work?

MB:  Essentially, medical liens are very similar to pre-settlement funding arrangements with one crucial difference: the funding company only pays for your medical expenses. With pre-settlement funding, you can use the money however you need. When you opt for a medical lien, the funding company pays for your medical care and is repaid out of your compensation package.

This is somewhat like the way that health insurance operates. Your health insurance might pay for your covered medical expenses now. However, if you are later compensated for medical expenses, having a lien means that the money goes directly to the health insurance company rather than you (since they are the ones who paid for your medical expenses). 

NLR:  What kinds of lawsuits are eligible for legal funding?

MB:  The short answer to this question is that, in order to be eligible for pre-settlement legal funding, you must:

 Live in a state serviced by your legal funding provider,

• Have an ongoing lawsuit,
• AND be represented by an attorney.

Most types of personal injury claims will be eligible for lawsuit funding, including car accidents, slip and fall injuries, medical malpractice, nursing home negligence, premises liability claims, dog bites, and dangerous products claims. Before applying for a lawsuit loan, please note that not every state allows for this type of funding. Some states have laws prohibiting lawsuit loans, so a pre-settlement funding company may not be able to assist you.

NLR:  What are some of the benefits of pre-settlement funding for lawyers?

MB:  While attorneys in most states are not legally allowed to lend clients’ money directly with interest, pre-settlement funding can be beneficial to attorneys as well. In some cases, there may be pressure to reach a quick settlement even if the amount offered is below what may be owed because cash is needed right away for expenses that can’t wait.

Also, many defendants will try stall tactics to force you to settle for low offers. If you’re able to fight for your settlement longer, you could give your attorney more time to build a stronger case. Pre-settlement funding can ease your current financial headaches and make going to court and having a protracted lawsuit less of a burden.  Though the amount advanced is deducted from your compensation package, settlement or court award, pre-settlement funding is a tool your attorney can use to your advantage. 

NLR:  What are some of the things to look for in a pre-settlement funding company?

MB:  Look for a pre-settlement loan company that has above-average attention to quality, customer service, and customer satisfaction, one place to look is Google Reviews, where there should be a large number of reviews and a large number of five-star reviews. Also look at the loan company’s Better Business Bureau rating.

Additionally, lawyers might want to look for a pre-settlement loan company that offers litigation funding for a large variety of cases. Some loan companies only provide funding for a select number of legal case types, and they are not always recourse-free.

Make sure that the interest rate works for you when deciding on a lawsuit loan.  A high-interest rate may leave you little to nothing to take home from your settlement.  A reputable legal funding company will clearly identify the interest rate on your lawsuit loan and will discourage plaintiffs from borrowing too much.

NLR:  Thank you Mark for sharing your insights on pre-settlement loans.

This column does not necessarily reflect the opinion of the National Law Review or National Law Forum. LLC.