The Problems with Pre-Settlement Funding

You will not find a shortage of companies that offer to loan you money on your case. I have seen them increasingly used in recent years. Having an injury can be a time-consuming, stressful and money-sapping process, especially if the client is out of work. As a result, businesses have been created with the idea of advancing money to injured people but, of course, fully expecting to get that money back plus interest and fees. It’s the “plus interest and fees” that need close examination.

The funding companies will tell you all the right things: an accident is not your fault, you’re probably struggling to pay your bills, and if you settle your case soon, you’re concerned that you may not get full value on the case. I do not disagree with any of those three statements. It is a time-consuming process. You may settle or “undersettle” your case if you need money quickly. Surely, if you are struggling to pay your bills, it is through no fault of your own. But we have often heard the expression that there is no such thing as a free lunch. Believe me, where these companies are concerned, nothing could be more true. If you go on their websites, you might not have a sense of what is in store for you when your case finishes. It is not pretty. I do not mean to disparage the whole industry but I think anybody who is contemplating such a contractual relationship with a funding company should be fully aware of the consequences. The websites don’t highlight the very extreme, very prohibitive costs you will have to pay upon the successful completion of your lawsuit.

I, as the attorney, never sign the pre-settlement contracts nor do I encourage my clients to go out and get pre-settlement funding. But inevitably over the last several years, some clients have. The interest rates are exorbitant; every month they go up. I am reminded of what Ben Franklin said on compounding interest and it applies here, “money makes money”. Well, being indebted on money means you will be even more indebted as time passes. Actually, the whole notion of compounding means the longer you hold onto money the more interest you will incur. This arises because of interest on the interest. Please note that I have not even spoken about the application fees or the processing fees that these companies impose.

The most important thing that you need to be aware of is that the interest rates and fees may shock you. Be fully aware of them before you engage in any such contract.

Please keep in mind that I am not talking about structured settlements. Those are a horse of a completely different color. Structured settlements come into play when the client chooses not to have the money in one payment, that is in one lump sum, but instead chooses to have a payout over time. That concept of a structured settlement is a very different proposition than pre-settlement funding, often referred to as lawsuit funding. You want your attorney to protect you. I hope that I take that mission seriously and, accordingly, I say to my client that he/she should borrow money from another source. Presumably, a friend, a family member or another source will not impose such draconian interest rates and fees. Tap into those, if at all possible.