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How does pre-settlement funding work?

When you apply for pre-settlement funding, the pre-settlement company will ask your attorney for the details of your case and relevant documents. They will then evaluate how likely you are to win your case—or settle before trial—and how much you’ll likely receive.

Once the company reviews this information, they’ll give you a pre-settlement funding offer. Discuss it with your attorney before proceeding. If you decide to accept the offer, sign the agreement accordingly. The company will then provide cash based on your agreement. Most companies offer 15-20% of the estimated settlement.

Unlike a traditional loan, you usually only repay the pre-settlement funding if you’re awarded a settlement.

Once your case is settled or you win a judgment, the proceeds of the settlement are distributed in the following order:

  • Medical liens and fees (in some states)
  • Attorney and court fees
  • Lawsuit advance (plus a funding fee)

You receive any remaining balance. The reduced (or eliminated) payout is the trade-off for receiving funds up-front from the pre-settlement company.

Reasons to Consider Pre-Settlement Funding

Despite the fees involved with pre-settlement funding, people often use it to cover expenses such as:

  • Medical
  • Rehab
  • Rent or mortgage
  • Other living expenses

Getting funding before your settlement helps you keep up with living expenses while your lawsuit is underway

How to Qualify for Pre-settlement Funding

Criteria for qualifying for pre-settlement funding varies by company. However, you must have already filed a lawsuit with an attorney representing you. You may also be eligible if you’re waiting to receive your funding after winning your lawsuit or agreeing to a settlement.

Type of eligible cases for pre-settlement funding

Not all cases are eligible for pre-settlement funding. Common cases where it may be an option include:

  • Personal injury
  • Wrongful death
  • Slip and fall
  • Medical malpractice
  • Auto accident
  • Nursing home abuse
  • Premises liability
  • Product liability
  • Worker’s comp
  • Employment discrimination

Tips for Choosing the Best Pre-Settlement Funding Company

Consider the following when choosing among pre-settlement funding companies:

  • Make sure they’re licensed to operate in your state, even if not physically present there.
  • Compare the amount offered—and fees charged—by each company.
  • Find out the interest rate charged by each company, which can significantly impact how much you receive from the final settlement.
  • Consider how frequently each company compounds interest. The more frequently it compounds, the greater the interest expense.
  • Find out how quickly you can receive funding. This is especially important when you need the funds for time-sensitive expenses like housing costs or medical bills.
  • Confirm that the funding is non-recourse, which means you don’t have to pay back the money unless you win your case.

No matter how urgently you need the cash, carefully compare offers to make sure you’re making the best decision. Consult with your attorney and consider meeting with a financial advisor as well—they can help you calculate the true cost of each offer. Also look for a pre-settlement funding company with an outstanding reputation and a stellar customer service team.

Pros and Cons of Pre-Settlement Funding

Understanding the advantages and disadvantages of pursuing pre-settlement funding can help you make a smart financial decision for your situation.

Pros

  • Receive cash quickly, which is especially useful if you have unpaid bills or are unable to work.
  • Avoid unnecessary debt or even bankruptcy by due to a short-term financial emergency.
  • Increase leverage when negotiating a settlement—you can potentially wait for a better offer or trial results.
  • Minimize risk—you usually don’t have to repay if you lose your case.
  • Skip credit checks and employment verification, which usually aren’t required.
  • Receive money soon—usually within days.

Cons

  • Interest and fees reduce the payout from any final settlement.
  • Lawsuits don’t always qualify for pre-settlement funding.
  • Research is required to get and evaluate offers.
  • Pre-settlement funding is not a regulated industry like traditional lending.
  • Cost of funding can be high.

Pre-settlement Funding Costs

Unlike traditional loans, you usually don’t repay your lawsuit cash advance unless you receive a settlement. At that point, you’ll first need to pay prioritized expenses which include your attorney’s fee, court costs, and (in some states) any medical liens.

After that, your lawsuit funding company is paid the amount they lent you, plus any fees, plus interest based on how long you borrowed the money. If the amount due exceeds your remaining settlement, the company receives what’s left and you usually aren’t responsible to pay the difference. If you have settlement funds after all parties have been paid, you keep the remaining cash.

Simple vs Compounding Rates

The type of interest charged on your pre-settlement funding makes a big difference in how much of the final settlement goes to the settlement company. A simple interest rate is only charged on the original funding amount. A compounding interest rate applies to both the principal balance and previously accrued interest. This makes compounding interest significantly more expensive when you borrow the money for a long time.

Pre-settlement funding alternatives

When you’re waiting on a settlement and need financial help, there are other options to consider beyond pre-settlement funding.

Personal loan: You may qualify for a personal loan if you have a good credit score and sufficient income to pay off the loans. The funds can be used for anything, including medical expenses and rent or mortgage payments.

Family and friends: It may be worth asking friends and family for financial help. Many people launch crowdfunding campaigns, especially after an accident or other injury. It’s an easy way for friends and family to help at whatever level they’re able to.

Conclusion

Lawsuits come with many challenges. Even if you win, it can take months or years to receive a settlement. In the meantime, you may have difficulty paying for expenses like utilities and food. If you were injured, you might also have mounting medical bills.

When you’re stuck in a drawn-out legal process, consider getting pre-settlement funding after consulting with your attorney and a financial advisor. You might be able to receive funds within days. If you don’t receive a settlement, you usually don’t have to repay, which can make this a less risky option.

FAQ

When is pre-settlement funding a good idea?

It’s worth considering when you can’t make ends meet and you have a pending lawsuit. Pre-settlement funding could provide a financial bridge until your lawsuit is settled. Consult your attorney and a financial adviser to determine whether pre-settlement funding makes sense in your specific situation.

Is there a pre-settlement payment limit?

Yes, each company has its own cash advance limit. Companies will only lend a percentage of your expected settlement value, usually ranging between 15% and 20%. For example, if a company decides your potential settlement will likely amount to $50,000, you can expect offers between $7,500 and $10,000. Many companies also have a dollar amount limit and won’t advance funds over a certain number.

How long does it take to get legal funding?

The timeline depends on two things: how quickly the company can process your application and how quickly your attorney communicates with them regarding your case. Once your application is approved and you sign the contract, it typically takes 1 to 2 days for the money to reach your bank account.

Do you need good credit to qualify?

No, credit is not a factor in the pre-settlement funding application process because you’re usually not responsible to repay the funds if you don’t win your case. If you win your case, the pre-settlement funding company will receive the payout directly from your settlement funds.

Is pre-settlement funding the same thing as a legal loan?

Be careful with the term “legal loan,” as some companies use it interchangeably with pre-settlement funding, while others use it to refer to a traditional loan used to pay for legal expenses.

It’s a key difference, because traditional loans must be repaid whether you win your lawsuit or not. Pre-settlement funding usually refers to non-recourse debt, which you don’t need to repay unless you receive a settlement.

Do you need an attorney?

Yes, you need an attorney to apply for pre-settlement funding.

What if I lose my case?

In most cases, pre-settlement funding is non-recourse financing. That means you don’t have to repay the funds if you lose your lawsuit.

Will the defendant know about pre-settlement funding?

It depends. If your lawyers are negotiating a settlement outside of court, then your lawyer is not required to tell the defendant’s attorney about your pre-settlement funding. However, if the lawsuit goes to court, some states require this information to be revealed.