Lawsuit Loans: How Do They Work?

A lawsuit loan is a cash advance against a future lawsuit judgment or settlement award.

If you're in the middle of a personal injury lawsuit and need money, you might be able to get a lawsuit loan—an advance against any future lawsuit settlement or award amount. These advances are known by many different names, including:

  • lawsuit loans
  • lawsuit cash advances
  • litigation financing
  • lawsuit funding, and
  • settlement funding.

But tread carefully before you jump at lawsuit funding. Borrowing against a future settlement or judgment can help you deal with short-term financial hurdles but might cost you a lot of money in the long run. Make sure you do your homework and understand the cost of getting a lawsuit loan.

Lawsuit Loan Advertisements

Perhaps you’ve seen the advertisements on daytime TV. A smartly dressed executive promises that you can have your money now if you can’t wait until your personal injury suit settles. Lawsuit loan companies market mainly to plaintiffs in personal injury suits, like traffic accidents, slip and fall cases, and medical malpractice. Some lenders also lend money to heirs waiting for settlement of a deceased person’s estate or to plaintiffs in employment or civil rights discrimination suits.

For someone facing high medical bills or the loss of income after an accident, the thought of getting money from a lawsuit right away can be enticing. But, is it in your best interest to borrow against a future settlement or judgment?

How Lawsuit Lending Works

Lawsuit funding is a relatively new product offered to plaintiffs who expect to settle or win a judgment in a lawsuit. Here's how it works.

After you file a personal injury lawsuit, you apply for the loan with a lawsuit funding company. The company evaluates your case to determine how much you can expect to get if you win or negotiate a settlement (the vast majority of personal injury cases are settled before trial). The lender offers you a sum of money immediately. In exchange, you agree to pay the lender that sum of money (the principal) and a “funding fee” out of the proceeds of your settlement or judgment. Usually you don't have to make any payments before you settle the case or get a judgment. The lender gets paid from the proceeds of the lawsuit judgment or settlement.

The Cost of Borrowing Against Your Future Lawsuit Proceeds

The “funding fee” can run between 2% to 4% per month. That might sound like a reasonable amount, but it equates to annual percentage rates of 27% to 60% or more. Considering that your lawsuit could take years to resolve, it's quite possible that you might pay back double or triple the money you borrow.

Repaying the Litigation Funding Lender

The loan is paid from the judgment or the settlement funds after other expenses are covered. When you reach a settlement with the defendant or when you obtain a judgment in court, certain expenses will be paid off the top. These expenses include:

  • The attorney’s fee. In personal injury cases, the attorney’s fee is often one third to one half of any recovery you're awarded.
  • The expenses of litigation, like process server fees, copy costs, and court costs.
  • Medical liens for services you got from doctors, hospitals, or other medical providers.

When all other expenses are paid, the lawsuit lender gets paid from the remainder.

Example 1: Settlement After One Year

You sue XYZ Insurance Company for $100,000 because of injuries you suffered in a traffic accident caused by one of the company’s insured drivers. A lawsuit lender evaluates your case and offers to lend you $25,000 at 3% per month.

A year later, your case settles for $100,000. The attorney’s fee, litigation expenses, and medical liens total $50,000. Of the remaining $50,000, you must pay the litigation lender the principal of $25,000 plus its funding fee of approximately $12,500. You then receive the remaining proceeds of $12,500.

$100,000 Settlement amount

- $50,000 Attorney’s fee, litigation expenses, and medical liens

- $25,000 Principal repaid to Lawsuit Lender

- $12,500 Funding fee owed to Lawsuit Lender

$12,500 Remainder to You

What If You Lose the Case or Settle for Less Than What You Owe?

On the plus side for the consumer, if you lose your case, you don't have to repay the loan. This is a risk that the lender takes and one of the reasons the cost of of a lawsuit loan is higher than other types of loans. Likewise, if you settle for less than expected, you will not have to pay more than the amount of your settlement.

Example 2: Settlement After Two Years

Let's say the case in Example 1 takes two years to settle instead of one. You will owe the lender the principal of $25,000, but the funding fee will balloon to $32,000. In that case, the lender will receive the principal of $25,000 and the remaining $25,000 of the settlement. That leaves a deficit of $7,000. You won't get anything from the lawsuit settlement, but you don't have to repay the $7,000 to the lawsuit lending company.

$100,000 Settlement amount

- $50,000 Attorney’s fee, litigation expenses, and medical liens

- $25,000 Principal repaid to Lawsuit Lender

- $32,000 Funding fee owed to Lawsuit Lender

-$7,000

If, after considering the expense and other downsides to lawsuit loans, you're still considering getting one, you can get tips on how to choose a reliable lawsuit funding company by reading How to Shop for a Lawsuit Loan. Because the lawsuit and settlement funding industry is largely unregulated, you must be extra vigilant if you're considering a lawsuit loan.

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