The Dangers of Pre-Settlement Lawsuit Loans: What You Need to Know Before You Sign

After a serious accident, you may be bombarded with medical bills while simultaneously losing income because your injuries prevent you from working. Routine household expenses continue to accumulate while your savings disappear, and your personal injury claim has yet to be resolved. At the very moment you need financial stability, the legal process often feels frustratingly slow. Advertisements by pre-settlement funding companies promising “cash today” or “money before your settlement” can seem appealing. Unfortunately, what may sound like a financial lifeline can become an expensive mistake. After paying the extremely high fees and financing charges, you may find that most (or even all) of your settlement goes to the funding company when your case is finally resolved. The need to seek financial assistance after an accident is understandable, but consult with your personal injury attorney before signing an agreement to ensure that your financial future is protected. For more information, contact Paul Padda Law by calling 866-526-7974 for a free, confidential review of your case.

Why Insurance Companies Want You to Wait (And Why You Might Be Tempted to Borrow)

Accident victims are often frustrated by the amount of time it takes to resolve their claim. It can help to gain a better understanding of the steps required to successfully negotiate a settlement or litigate a claim. Your attorney must first investigate the collision, ensure that you are receiving proper medical care, gather your medical records, and consult with treating physicians. Only then can your attorney calculate your damages and begin negotiations with the insurance company. If settlement negotiations are unsuccessful, the case must be prepared for trial and litigated in court.

Throughout your case, the insurance company has an incentive to move as slowly as possible because they typically benefit when a claim remains unresolved. Insurance companies know that as an injured victim faces increasing financial pressure, the likelihood of the victim accepting less than full and fair compensation increases. This “delay and deny” tactic is a commonly used strategy that makes pre-settlement funding advertisements attractive to injured victims struggling with financial hardship. Solving one financial problem by creating another, however, usually benefits the funding company far more than the injured victim.

The Reality of Pre-Settlement “Loans” (And Why They Aren’t Actually Loans)

Although often referred to as “lawsuit loans,” these financial products are not typically loans in the traditional sense. Instead, they are generally structured as non-recourse litigation funding agreements. What that means is that the funding company advances you money in exchange for the right to receive repayment directly from your future settlement or verdict.

In this context, the “non-recourse” term refers to the fact that repayment is usually tied to the success of your case. If you recover compensation, the funding company is repaid pursuant to the terms of the agreement. If you do not recover compensation, you are not required to repay the advance.

While this makes these agreements sound relatively risk-free, it is important to understand that funding companies only accept the risk because they earn substantial returns through high fees and astronomical interest rates on successful cases.  Consequently, seeking short-term financial relief can come at a very high cost in the long run.

The “Hidden” Costs: How These Advances Can Devour Your Settlement

The most significant danger associated with pre-settlement funding is the amount you ultimately repay. Funding companies routinely require you to sign agreements that include exceptionally high interest rates along with administrative fees, processing fees, origination charges, and other contractual costs that are often hidden in the fine print.

Moreover, some agreements include terms that assess charges monthly, causing the balance you must repay to balloon much faster than you anticipated. Before you know it, the $5,000 advance you received has doubled, and you now owe $10,000 of your settlement to the funding company. Instead of using your settlement funds to pay for future medical expenses, replace lost income, or provide financial stability for your family, a substantial portion may be diverted to the funding company.

As the amount you owe continues to increase, you may feel pressure to accept a settlement just to stop the fees and interest from compounding. Instead of providing you with financial stability while you await a fair and full settlement, you may inadvertently remove your most important negotiating leverage. 

If you’re struggling to pay your bills while waiting for your case to settle, you are not alone. There may be better ways to manage your expenses than a high-interest loan. Let’s discuss your options.

Are There Better Options? Protecting Your Recovery in Nevada and Illinois

It can be tempting to turn to a lawsuit funding company when you are struggling to pay your bills while your personal injury case is pending, but it is imperative to understand that it is not your only option. Our experienced personal injury attorneys will work with you to identify alternatives that preserve both your financial stability and the value of your claim.

One alternative option is to utilize medical liens, often referred to as Letters of Protection. These are agreements with medical service providers to delay payment until your case is resolved, allowing you to receive critical treatment without paying out-of-pocket while your claim is pending.

We can also help you evaluate other alternatives, including available health insurance benefits, Medical Payments Coverage (MedPay), payment plans with healthcare providers, disability benefits, or other resources that can prevent you from falling prey to expensive litigation funding agreements.

We work with a network of trusted medical providers who can treat your injuries without needing cash up front. Call us to see how we can help you stay financially stable without predatory loans.

Why You Should Always Consult Your Attorney Before Signing Anything

Before entering into a lawsuit funding agreement, discuss the proposed contract with your attorney to ensure that you fully understand how the agreement may ultimately affect your financial recovery. These agreements routinely contain unfamiliar and confusing provisions, including complex repayment formulas, that often make it difficult to determine the true cost of accepting the funding.

Your attorney can review the agreement and evaluate how the arrangement could impact the overall outcome of your case. If warranted, your attorney can help you explore alternative financial resources that avoid high financing costs and maximize the amount that ultimately remains in your pocket.

Protect your future. Before signing any contract with a funding company, schedule a free, confidential review with our elite legal team.

FAQs

What is a “non-recourse” lawsuit loan, and is it really safe?

Non-recourse funding means you are not obligated to repay it if you do not recover compensation from your personal injury case. It removes risk, but you will pay a high financial cost for this type of funding.

If I take a lawsuit cash advance, does it affect the final value of my settlement?

Yes, because the funding company is entitled to be repaid out of your settlement proceeds before you receive any money.

Can my personal injury lawyer stop me from getting a lawsuit loan?

No, but you should discuss the agreement with your attorney before signing the document.

I’m drowning in bills in Las Vegas—are there alternatives to high-interest litigation funding?

Yes. Your attorney can discuss alternatives, such as Letters of Protection, MedPay, and other options that protect your long-term interests.

How do medical liens (Letters of Protection) work for car accident injuries in Chicago?

Your medical providers agree to provide services but delay payment until you receive a settlement or award.

Will an insurance company offer me a lower settlement if they know I have a lawsuit loan?

Insurance companies frequently offer less compensation when they know an injured victim has a lawsuit loan pending because they know that the loan gets more expensive each month, giving the injured victim an incentive to accept a settlement even if it is for less than the case is worth.

Are there any laws in Nevada or Illinois that cap interest rates on lawsuit funding?

Yes. Both Nevada and Illinois have laws that cap interest rates and address fees for lawsuit funding agreements.

What happens if I lose my case after taking a “non-recourse” loan?

In most cases, you are not personally responsible for repaying the funds if you do not recover compensation.