A topic of conversation that comes up often with clients and prospects of Resolution Funding is whether lawsuit funding, especially pre-settlement funding, is legal or fair to the person receiving it.
It’s a fair question and we understand why people ask. The reality is that our industry has received a lot of negative press regarding its practices. Many professionals feel that pre-settlement funding is comparable to predatory lending—a form of loan sharking. In recent years, in fact, several states have put forth and passed bills to regulate the practice of pre-settlement lawsuits. Those bills also contain provisions that contracts must be clear, cancellable, and generally reasonable for consumers.
Much of the support for such proposed bills has come from states’ Bar Associations as well as other groups that advocate for the regulation of “loan companies” like ours. There is a push to protecting unknowing clients about the dangers of litigation funding and to make them aware of how they could, in fact, be better off by finding an alternate solution.
While we believe wholeheartedly in transparency and fair practices, there are a few things worth noting:
- Pre-settlement funding is different from lending. There is some confusion about what exactly we do. Pre-settlement funding is not the same as lending. The way it works is that we purchase part of your lawsuit settlement and offer you a lump sum in between the time your case is filed and any funds are disbursed to you. Both pre- and post-settlement funding are non-recourse funds. This means you don’t have to pay back any advance you receive if your case loses.
- Pre-settlement funding is a stop gap, not a predatory practice. Clients who turn to us or companies like us are in desperate need of help. Many have already tried to get loans without success. Often, they have mounting expenses after their involvement in an accident that has left them unable to work and they have no viable options to get money to pay those expenses. Our business is NOT to target people when they are vulnerable, but to offer them a solution to make ends meet while waiting for a lawsuit settlement.
- Transparency is guaranteed with American Legal Finance Association (ALFA) member companies. While we can’t speak for all settlement funding companies out there, those who are members of the American Legal Finance Association (like us) are held to a standard that requires them to act transparently and ethically. Your attorney must provide written acknowledgment before we offer you any funds, which protects you because it means they will review any contract to which you agree with us. We strive to not over-fund any client and we don’t pay commissions or fees to any attorney for referrals. We also provide clients a clear and detailed account of all fees and interest associated with their advance.
Another major complaint about settlement funding companies is the high cost. You’ll hear that companies like ours charge high interest rates that will leave you with nothing after you finally receive a settlement. What’s important to understand is the risk involved on the part of the firm you select. Because you’re receiving a cash advance backed by your lawsuit settlement (which you haven’t yet received) as opposed to a loan backed by a tangible asset like your home or car, the risk taken on the by the settlement funding company is high. If you lose your case, the settlement funding firm receives nothing, including repayment of the money they advanced you.
Pre-settlement funding can be expensive, but it’s also not something you seek unless you really need it. Perhaps you are waiting on your case to settle and just need a small amount to get you through the months while you have no income. Maybe you’ve been offered a fast settlement that would yield far less than your attorney thinks you could get if you pursued the case in court. In either case, pre-settlement funding can help you pay your bills in the meantime. If you do receive a settlement award, that money will first repay legal fees and outstanding liens, then pay back your cash advance (plus fees and interest accrued over the course of the legal process). Whatever funds are left are yours.
The bottom line: litigation funding is legal and ALFA members abide by a code of ethics that protects you, the consumer. While there’s no denying that interest adds up, the working capital that a lawsuit advance provides you to pay your bills and keep your life intact is the tradeoff. Lawsuit advances also allow you to wait long enough to ensure you don’t accept a premature settlement for less than your case is worth.
We’re always here to answer your questions. Call us at 855-LAW-ADVANCE to learn more about advance lawsuit funding and how it works.