Pre-Settlement Funding Risks
Pre-settlement risk is the risk that comes with taking out a pre-settlement funding loan. Pre-settlement funding is not like other loans where you borrow money now and pay it back later. Pre-settlement allocation involves placing a lien on your pending lawsuit to receive cash today.
In exchange for giving up some ownership of your future lawsuit, you get cash today that can be used whichever way you want. There are risks associated with receiving pre-settlement funding if your case does not win at trial or settle beforehand. The most important thing to understand about this kind of financing is the concept of non-recourse debt. This implies that the lender cannot come after the borrower for more than what is agreed upon in the funding agreement.
Some of the risks involved in the pre-settlement funding include the following:
1) If your case does not win, you do not have to repay the money
If you lose your lawsuit, you will get no settlement or award. Therefore, there is nothing for a lender to take. This means that if your case does not win at trial or settle beforehand, then the pre-settlement funding company cannot come after you for the money you received.
However, it is important to note that if your case settles and there is not enough money left over after all your legal fees are paid, a lender may pursue repayment of the loan. If you win and get $30,000 in settlement funds when your attorney costs were $40,000, the funding company may come after you for the balance.
It is important to ensure that your pre-settlement funder has a thorough understanding of how your case was handled and knows all of the costs involved. The most common way this happens is when an attorney takes on a personal injury lawsuit with no upfront money from the client. In this case, a plaintiff is not required to pay for the costs of the suit, and it will all be paid by the attorney instead.
2) Failure to perform required actions
If you fail to take the necessary steps in your lawsuit, a pre-settlement funder may rescind the funding agreement. It means that you would have to repay the loan immediately. Some of the actions that could lead to this include not showing up for court dates or filing required paperwork on time.
3) You cannot get the full amount of your settlement
When a pre-settlement funding company agrees to give you money in exchange for part ownership of your lawsuit, they do not usually get the full amount. Most companies will only offer about 20% or less of your case is worth. For instance, if you have been offered $50k from a lender but think your case is worth $100k, you may still need to find another lender willing to provide more money.
4) The funding company may fail to approve the application
There is no guarantee that a pre-settlement funding company will approve your application. Many companies have very strict requirements for who they will and will not fund. This includes things like the stage of litigation your case is in and how likely it will win. Funding companies approve cases that show clear harm to the plaintiff and fault to the defendant. Such cases are typically easier to win in court.
If your case does not meet the requirements of a pre-settlement funding company, then you will have to look for other ways to get money for your lawsuit. It could include borrowing from friends or family, taking out a loan with a high-interest rate, or using a credit card.
5) The company may sell your case to another party
When you receive pre-settlement funding, the lender usually takes possession of your lawsuit. They can do whatever they want with it, including selling it to another party. If this happens, you may no longer have any say in how the case is handled. It is important to read the fine print of your contract carefully before signing so you know exactly what rights you are giving up.
If this happens and a pre-settlement funding company sells your case, they may pay less than 20% of the total settlement amount owed to them. This means that you could end up getting less money than what was originally agreed upon, even if everything else goes according to plan.
Pre-settlement funding is a risk for both the plaintiff and funder, but it can be an excellent option if used wisely. Before signing any agreement with a pre-settlement funding company, make sure you understand all the details of what you agree to.