Understanding the Pre-Settlement Finance Industry

You have seen the advertisements on television, or you have heard the advertisements on the radio. Do you have a lawsuit? Are you in dire financial need? Let us help you out. It is just a five minute phone call.

Before you pick up that phone, there are a few things that you need to know, which may not have occurred to you. And when you pick up that phone, there are some questions you had better ask before you sign on the dotted line.

The Pre-Settlement Finance industry is like gambling on a lawsuit. People with extra money to invest speculate in lawsuit outcomes in much the same way that you & I might invest in the stock market. And for the most part it is all completely legal. But there are some issues that can and need to be addressed on a state-by-state basis in order to see if you can even enter into one of these contracts.

1. What is pre-settlement finance?

It is also known as a lawsuit loan or litigation finance. When you have a PENDING legal matter (one in which there is no final judgment or settlement), companies will offer to advance you money in exchange for interest that comes directly out of any settlement or judgment that you obtain.

2. Compounded Monthly Interest

The interest on most of these advances would be considered illegal if this were actually a loan, because most litigation funding companies charge between 2.5% and 5.99% compounded MONTHLY. Compounding means that at the end of each month, the amount due, plus the interest accrued is multiplied AGAIN by the interest rate applicable. For example:
$5,000.00 Advanced at 4.5% compounded monthly would be calculated as follows:
$5,000.00 x 1.045 (100% plus 4.5%) = $5,225.00 at the end of one month.
And then the following month, the new total, $5,225.00 is multiplied by 1.045 for a total of $5,460.13, and so on.

If you were to figure out the annual percentage rates (APR) for each of these rates of interest, it would break down as follows:

2.5% is equal to an APR of 34.48%;
2.9% is equal to an APR of 40.92%;
2.99% is equal to an APR of 42.41%;
3.0% is equal to an APR of 42.57%;
3.5% is equal to an APR of 51.10%;
3.9% is equal to an APR of 58.26%;
3.99% is equal to an APR of 59.91%;
4.0% is equal to an APR of 60.10%;
4.5% is equal to an APR of 69.58%;
4.9% is equal to an APR of 77.54%;
4.99% is equal to an APR of 79.38%;
5.0% is equal to an APR of 79.58%;
5.5% is equal to an APR of 90.12%;
5.9% is equal to an APR of 98.95%;
5.99% is equal to an APR of 109.91%

(Note that each of the above interest rates is truncated without rounding up or down. Count on the funders rounding up)

So how do they get around the illegality of loans above 21% interest per year or thereabouts as set in each state?
Well this is a CONTINGENT advance. What that means is that if you don’t get any money back from your case, then YOU HAVE NO OBLIGATION to repay the advance. In other words, payment is CONTINGENT upon the outcome of your case. Therefore, under the law of most states, this does not qualify as a LOAN, so laws applying to loans to not apply to this type of advance. Or at least that is the argument.

In fact, many companies will try to sell you on the idea that you need not pay it back if you lose your case. That is a common sales technique to sell these advances. In fact, more than 85% of all litigated cases in personal injury reach settlement before they even get to see a court room. Thus, in all likelihood, the advance will result in repayment. The question then becomes how much you would get out of the entire settlement.

Normally, before you see a DIME of any settlement or judgment, there are a few chunks of money that have to come out of the proceeds first.
1. The attorney’s costs and fees; AN ATTORNEY ALWAYS GETS PAID FIRST on a lawsuit, and they never pay for the costs of motions, copying, certified mail or other document handling related to your case, unless by special arrangement. Costs for the attorney on a personal injury case usually run anywhere from 33 1/3% to 40% if the matter goes to trial, and vary with the state bar association’s rules on attorney fees, or the state statutes governing them. Don’t forget that any experts, costs of depositions, and transportation and lodging of experts may be taken out of the proceeds as costs.
2. Pre-existing Liens or Bills under Letter of Protection; If you have a Child Support Order, an Alimony Judgment, a deficiency judgment, a lien from a credit card, or, more likely, liens from hospital bills, medical services or medical evaluations, they will be paid and/or negotiated before you see any return. The advantage is that these bills are taken care of for you, but the down side is that you may perceive that you are getting very little return on your case.
3. Pre-Settlement Liens; If you take a pre-settlement advance, remember that they are not going to want to chase you down for the money after you get it, so their CONTRACT will require you to promise to pay them before you are paid, and it will likely require your attorney to contersign as a promise that he will pay them first.
4. You; Once all that is paid, then you will get what is left over. That may be quite a bit, or nothing at all, depending upon your case.

3. Isn’t this a Usurious Contract?

Usury is the charging of an unconscionable or illegal rate of interest. It usually applies only to loans and other secured transactions of a similar nature, and in some states, a usurious contract can not only be avoided in litigation, but it can be the grounds for criminal charges against the drafter of the contract. The drafter of such a contract does not typically include a consumer who has signed one of these agreements, since that is the person such laws were meant to protect.

Remember what I said before about this being a CONTINGENT advance? Because there is no guarantee that there will be repayment, this does not qualify as a loan in most states, and therefore, it is not susceptible to an attack as a usurious contract. In other words, you can’t get out of such a contract on the grounds of usury in most circumstances, so you had better think about that before you sign on the dotted line.

4. Can my attorney participate in this process, and does he or she have to sign the contract if I decide to get an advance?

In most states (with the notable exception of Texas), it is ILLEGAL and an ethical violation to advance money to a client if you are an attorney. There are two reasons that explain this. The first is that by INVESTING in the case, your attorney creates a conflict of interest because he has to consider both your legal goals and his own goals in recuping his money at the end of the case. Such a conflict is impermissible because the attorney’s only goal in representing you should be as your agent in the litigation. In addition, historically, there was a law against activity that was considered CHAMPERTY. Champerty would be the sharing of proceeds of a lawsuit by an outside party who has promoted the litigation. In other words, by proffering the money to bring the lawsuit, the attorney would have promoted a lawsuit that would not have otherwise been brought, thus clogging the courts and wasting their time. Most states no longer recognize Champerty concepts, but there is a strong disfavor of frivolous lawsuits.

Because most attorneys cannot advance funds, and because many clients who have suffered personal injury are susceptible to financial distress while they recuperate, pre-settlement funding companies have evolved to answer this need in a highly profitable way. This is what you need to be aware of. They are NOT in business to help you like some sort of non-profit agency; they are in business to make money. Pure and simple.

While such contracts are disfavored, attorneys are allowed to take part in such contracts in most states as long as they do not take a financial interest in the case. One notable exception is in Ohio. Ohio has decided to rule that such pre-settlement contracts are illegal (See the Rancman case, it is available on google). Most attorneys, as well-educated as they are, have a definite position on such contracts. Either they will view it as a financial decision of the client that they should counsel the client against, because of it’s unfavorable terms, or they will refuse to participate in such a process. Positive feedback on such contracts is so rare as to be unworthy of mention.

You attorney is under NO OBLIGATION to assist you in obtaining such a pre-settlement advance, and in some cases, attorneys would rather see the client find new representation than become involved in such a process. Then there are attorneys who will grudgingly agree to sign, or who will sign under protest. Be aware that when an attorney signs such a contract for you, they do not become personally liable on the payment of it except in the rarest of circumstances, such as when they pay you the proceeds and forget to pay back your advance. They are not CO-SIGNORS of the advance, and it should not be perceived as a debt that you share with your attorney. The obligation to repay is PURELY yours in most cases.

5. The Process

Well, if you’ve still determined that you want to take part in this process, there are some things you need to know about the process. First, the company will want a look at some of the documents your lawyer uses to help with your case, and those documents include things like Polce Reports/Accident Reports, ER Reports, Medical X-Ray reports, MRI reports, information on the insurance companies involved, expert reports, and other documents that are useful to proving liability for and causation of your injuries.

While some companies may promise a speedy turnaround on a funding request, the reality is that depending upon the stage of your case, it could take weeks to get the documents that you need to be able to get money from them. For example, if your attorney has not received a response from the other person’s insurance company, your review will have to wait until it comes in. Most companies will not advance funds until they know the upper limits of the policy they think will be paying you.

In addition, some medical providers may need a signed HIPAA form from your attorney or the pre-settlement company to send documents over. These documents also take some additional time.

Once those documents are received, they will need a day or so to be reveiwed, and then the funding company needs a day or so to draft your funding contract if you are approved, and then to send out a copy to you and to your attorney. Upon receipt of the contract, your attorney will likely speak to you about the contract and discourage you from entering into it, or the attorney may even demand changes in the contract before he or she signs it. This is not in order to be difficult, but rather, your attorney is trying to protect you from terms that he thinks may be problematic or by preventing you from entering a transaction that he or she perceives will ultimately be detrimental to your financial conditions. Think about that for a minute or two. Let it sink in. Would you be looking for this money if your own financial sense had been excellent? Probably not.

Once signed, the companies are usually very diligent in getting the money out to you. After all, the faster you get it, the sooner the interest begins to accumulate. Then they wait until your case is resolved.

6. How long can a typical lawsuit take, and what does that mean if I got an advance?

Waiting for a lawsuit to resolve is a lot like watching grass grow. You never know how fast it is going to go, and it takes a VERY, VERY LONG TIME. An “easy” case might take six to eight months between exchanging information and figuring out what the value of the claim is, and another three months to send the check. A complicated case can literally take YEARS. Remember those APR rates listed above? If you took $5000.00 on a case at 4.5% and it took three years to settle and pay out, then you would be looking at paying back a minimum of $24,386.89 assuming there were NO FEES, and that the FEES were not also financed. If your whole settlement is $100,000.00, and your attorney takes his 1/3 fee and has costs of $10,000.00, and then you paid back the lien and had NO OTHER BILLS, that would leave you $32,280.11. If the settlement is $50,000, then you would get NOTHING back. That can happen.

Thus, while it is important not to settle for a low-ball figure, if you get into one of these contracts, you have to keep a constant vigil over the interest accumulating to make sure you know how much you’ll need to pay back in the future.

7. A note about who these funds are most often taken by and under what circumstances they are advanced

Never let it be said that a sucker isn’t born every minute. Most of these pre-settlement funding companies have ONE target demographic: The lower class, and the economically disenfranchised. Translate that to mean those in the lowest rungs of the earnings spectrum. That means that if you are at home in the middle of the day, and can watch TV, you’ll see the ads. And when you call, they’ve got people who will identify with you on the other end of the phone “because they understand,” and they are just trying to help you out. Believe that and I have got a bridge to sell you. They are employed at a company that is ready to sell you an advance at 50% APR and above. It is not any intentional attempt to fool you out of your cash, but it IS a capitalizaiton on YOUR economic distress.

Some companies will even tell you that you should find the money elsewhere before you come to them. You should listen to that advice. These companies are a last resort. Even if your credit is bad and you can’t get a loan and you can’t make ends meet, the only way one of these contracts could work out to your advantage is if it puts food on the table and keeps a roof over your head while you wait for a REALLY, REALLY good case to settle. If you decide to enter into one of these agreements after all of this, I have five pieces of widsdom to share;

1. I REALLY hope you get a huge settlement;
2. Don’t take a cent more than you need to get by;
3. If you can get it paid in installments with interest beginning on later dates, do it;
4. DO NOT spend this on anything that you would normally have bought with a creidt card or a loan, like a car, clothes, a trip or something ridiculous like that.
5. Keep in constant touch with your attorney and with the funding company to make sure your case is moving forward and to make sure you know how much you will owe.

I would also like to provide a list of questions you should ask if you ever speak to one of these companies:
1. What is the range of interest rates available, and what is the average interest rate?
2. Are there any fees if I am approved, and if so, how much are they?
3. Are the fees financed with the rest of the money?
4. Is there a ceiling on the amount to be paid back?
5. When do I have to pay the funds back?
6. When an I am excused from repayment of these advances?
7. Is it possible to get paid in installments?
8. What if my settlement doesn’t pay out right away? Does the interest continue to increase?
9. Do you share my information with the defense at any point? (This may affect how much they are willing to pay you.)
10. Must my attorney be involved with the process? (If they don’t require it, they might be a very small firm, and you should do your homework before you do ANYTHING with them)
11. DO you share ANY of my informaiton with ANY third parties?
12. What happens if I apply and I am rejected?

Hopefully this has helped you understand pre-settlement finance a little bit better. On the whole, please try to avoid such transactions at all processes, since the interest rates are so high as to be detrimental in the long run. If you can find a charitiable source to help you cover costs, then it is definitely a better source. There are more out there in your community than you might be aware of.

If you still must do it, then do it VERY, VERY carefully, and discuss ALL of the implications very thoroughly with your attorney before you apply and during the whole process.