Pre-settlement funding allows individuals to pay for legal expenses before a lawsuit is settled. This procedure is controversial due to the lack of clear laws. Getting sued and litigating can be very time-consuming and expensive. Even after a big settlement, it can take a long time for the money to arrive.
There are various ways to get the money needed for legal expenses, such as pre settlement loans, traditional loans and other forms of financing.
What is Pre-Settlement Funding?
During a lawsuit or case, the pre-settlement funding or advance occurs when a plaintiff gets some of their funding before a final decision is made before the courts. The company that advances the money will require from the plaintiff some documentation, including records of information from the attorney and medical records regarding the case.
Pre-Settlement Funding Tip
Traditional credit unions and banks don’t typically give loans to people based on the “expected” results of a case. This is where settlement advance companies come into the picture.
If you win your case, the amount you were advanced will go to the company. Even if the case doesn’t settle in your favor, you will still owe nothing. The U.S. Chamber of Legal Reform claims that hedge funds are involved in the arrangement where the plaintiff receives a portion of the settlement or verdict.
Structured settlements began in Australia before spreading to the United Kingdom. Years later, the use of these types of settlements was being used in Canada, Asia, the United States and Europe.
Critics’ Feelings About Interest and Fees
Critics of these kinds of loans and advances often complain about the excessive fees and interest rates. Due to the nature of these products’ business, they are unregulated in most states. One company that offered a 98% annual rate on its website said that it would charge a maximum rate of 26.9%.
A study conducted in 2018 by a financial watchdog noted that these types of products have a complicated and circuitous system. The study also revealed that some firms used “unconventional” methods to determine the amount due from the clients.
The Institute for Legal Reform stated that these types of settlements can lead to more lawsuits and delay the resolution of cases. The group also stated that these types of settlements could result in more lawsuits and prolong the legal proceedings. Some companies also charge a fee for referring potential clients. Others, however, may charge a flat fee for their services.
Are Litigation Advances Considered Loans?
Although courts have generally ruled that these types of advances are not considered loans, they have argued that they affected the consumers’ legal rights. A trade organization claims these types of funding options are not considered loans and should not be regulated like traditional ones. They do not have to be repaid if the court award or settlement doesn’t happen.
Unlike traditional loans, these advances do not require a credit check. They can also benefit consumers’ credit ratings. Although some states have ruled that these types of loans are not loans, many of them still consider them as investments and not loans.
Consumer Protection Guidelines
Due to the complexity of the laws in the US, it is difficult for consumers to know their rights and obligations when they use these types of transactions. The Association of Regional Consumer Protection Officials (ARC) noted that several states have high levels of protection for consumers. However, Arkansas and Tennessee have some of the strictest regulations for these types of loans.
Provisions Advocated by ARC
Before a settlement agreement is signed, it should clearly show how much the consumer will pay each month and the maximum amount the provider can ever recover. This ensures that the consumer has the right to rescission within five days after the funds have been used. It also prohibits the use of funds for any purpose other than settling the legal claim.
This rule prohibits the use of funds for any other purpose except for settling the legal claim. The attorney-client privilege also prohibits attorneys from having a financial interest in a settlement firm that provides funding.
Due to the nature of these transactions, the firms that provide funding must register with the state authorities and have certain documents to ensure their solvency. The American Bar Association’s Commission on Ethics 20/20 noted that these types of transactions are beneficial for consumers. However, it warned that lawyers should be on the lookout for ethical issues.