Pre-settlement funding can provide financial support to plaintiffs who are waiting for a lawsuit to resolve. The money may be used for rent, utilities, groceries, medical expenses, transportation, and other costs that continue while a case is pending. Before accepting funding, however, it is important to understand how fees and costs work.
Pre-settlement funding is different from a conventional consumer loan, and its pricing structure may also be different. Understanding the agreement before accepting funds can help you estimate how much of a future settlement may ultimately be used for repayment.
A pre-settlement funding company provides money based primarily on the potential value and outcome of a legal claim. Because funding is generally non-recourse, repayment is typically dependent on the plaintiff receiving an eligible settlement or award.
If the case does not result in a qualifying recovery, the funding company generally cannot collect repayment from the recipient’s personal assets. Fees help account for the financial risk the funding provider accepts.
Fee structures can vary between pre-settlement funding companies. Depending on the agreement, fees may be calculated based on the amount funded and how long the case remains unresolved.
This makes time an important consideration. A case that settles relatively quickly may have a different repayment amount than one that takes several years to resolve.
Before accepting funding, ask the provider to explain exactly how fees accumulate over time.
Applicants should also determine whether an agreement contains charges beyond the primary funding fee. Depending on the provider and agreement, there may be administrative, processing, application, or other fees.
Do not assume that a quoted rate represents the complete cost. Ask for an explanation of every applicable charge and how each one affects the total amount that may eventually need to be repaid.
The repayment amount is one of the most important numbers to understand when considering pre-settlement funding. Ask the company to provide examples showing how much could be owed at different points in the future.
For example, you might request estimated repayment amounts if the lawsuit resolves in six months, 12 months, 18 months, or two years. These examples can make the cost structure easier to understand.
Keep in mind that these figures may be estimates if the settlement date is unknown.
It can be tempting to accept the largest amount of pre-settlement funding available, especially when bills are accumulating. However, funding generally must be repaid from the proceeds of a successful case.
Consider how much money you actually need. Borrowing only what is necessary for essential expenses may help preserve more of your potential settlement.
Before accepting pre-settlement funding, read the agreement carefully and ask questions about anything you do not understand. Pay particular attention to the funding amount, fee structure, repayment calculations, and non-recourse provisions.
Your attorney can also help you understand how the funding agreement relates to your case and eventual settlement distribution.
Pre-settlement funding can provide access to money during a financially difficult period, but understanding its cost is essential. Comparing fee structures, reviewing potential repayment amounts, and considering how much funding you actually need can help you make a more informed decision before signing an agreement.
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