Lawsuit Loans and Pre-Settlement Funding: An Attorney’s Perspective
At Negretti & Associates, in our day-to-day work as attorneys, it’s not uncommon for our clients ask us, “Should I get a lawsuit loan?”
A lawsuit loan — sometimes called a settlement loan, or pre-settlement loan — is essentially a loan taken out as an advance on the settlement of a personal injury case. Many companies offer these loans.
Why do lawsuit loans exist? After getting into accidents, people may miss work. They may be hourly employees, and not have paid time off. Meantime, rent, medical bills, and credit card statements keep coming due. Compounding things, cases may take months — perhaps years — to become resolved. As attorneys, we hear about hardship situations such as these on a daily basis.
How Do Lawsuit Loans Work?
A lawsuit loan company will offer a loan after carefully assessing the value of a claim, based on its experience and expertise. Lawsuit loan firms typically do not lend more than 10 to 15 percent of the amount that the borrower will receive from a settlement.
Consider the following example:
- Estimating that a lawsuit settlement has a value of $30,000, the lender may calculate that the borrower will receive a third of that figure, after paying attorney’s fees and medical bills.
- Projecting that the borrower will receive $10,000, the lender will issue a loan of $1,000 to $1,500 on the personal injury claim.
Yet, here’s what you have to remember: Due to the costs associated with generating the loan, along with the interest that accrues with that loan, the borrower may be obligated to pay back more than twice the loan amount — even if the loan is outstanding for just a few months!
The reason why? Lawsuit loans have no “recourse” associated with them. In other words, there is no personal guarantee associated with this type of loan. They are unlike a mortgage or a car loan, where the lending company holds the title to the property and can repossess the property if payments become delinquent.
Since lawsuit loans are “non recourse,” when a lawsuit fails, and the client recovers nothing, the lending company is not paid, either. The lender therefore takes a big risk when issuing the pre-settlement loan.
This explains why these lenders usually charge very high interest rates. In addition to the interest accrued during the time while a loan is outstanding, borrowers face substantial initiation fees, document preparation fees, and other processing costs. There isn’t a cap on what pre-settlement funding lenders can ask for.
Do Lawyers Give Advances on Settlements?
It’s important to remember that attorneys cannot lend money on cases that they represent. The rules of ethics that govern the legal profession do not allow for this. By issuing a lawsuit loan to a client, an attorney could lose his or her license to practice law!
Because attorneys cannot issue loans, third-party lenders have entered the picture, as a way of providing clients with up-front, immediate funding while their cases are resolved.
Are There Alternatives to Lawsuit Loans?
At Negretti & Associates, we discourage clients from seeking lawsuit loans. We believe that clients should not put themselves in situations where they’ll be obligated to pay back two times the money they borrow, simply to have a cash advance for a couple months.
Further, one should not treat a personal injury claim like a bank account. Doing so is the wrong way to look at the entire process. Just as no one expects to get into an accident, one shouldn’t have any expectations of recovering money related to that accident.
We try to do our best to work with our clients and put them in positions to either resolve their cases as quickly as possible — achieving a fair value for a case in the process — or explore alternative ways of borrowing money, when necessary. Ultimately, however, we disapprove of using these loan products, because of the fees and costs associated.
We would much rather see a client borrow money from a friend or a family member — someone who isn’t going to charge fees and interest to borrow some money.
The Attorney’s Role in the Lawsuit Loan Process
On some occasions, in the most challenging situations, there may not be an alternative to pre-settlement funding. When necessary, as attorneys, we will certainly respect the client’s wishes and become involved in the loan process.
In our role as the client’s legal counsel:
- We must guarantee to that lending company that we’re going to pay them from the proceeds of the settlement; and
- We are typically asked to sign on the same loan agreements as the borrower, acknowledging that we are bound to pay the lending company for the loan issued on the personal injury claim.
In sum, when signing onto a lawsuit loan, the borrower agrees to pay part of their settlement to a third party. Essentially, they’re assigning their rights to someone else.
Negretti & Associates carefully reminds each client that there may be a time in a case’s lifespan when real life intersects with a personal injury claim. Bills need to be paid. Clients may face the possibility of having no food on the table, or possibly being evicted, going to collections, and having credit ruined. Clearly, these are tricky issues to wrestle with. These are real things that attorney and client must collaboratively contemplate together.
If you get into a situation where you’re faced with such a dilemma, and you want to just talk things over, Negretti & Associates will be happy to have a conversation with you. Call us at 602-531-3911 in Arizona, 619-777-3370 in California, or 720-636-3444 in Colorado. Or, you can contact us with our online form.