What is settlement funding?
Settlement funding is the act of receiving cash in advance of a lawsuit settlement. The funder charges an interest rate usually between 30% and 60% per year and is paid back only at the end of the case if it’s successful.
Personal injury lawsuits can sometimes take years to settle, and during that time bills often pile up exacerbated by the underlying accident and medical expenses. Being able to access part of the settlement before the case resolves can be a lifeline. But it’s also usually expensive and can quickly spiral if not taken thoughtfully.
Settlement funders are the financiers who step in to provide you with that money, but their assistance comes with strings attached. Before you accept their help, it’s important to fully understand what settlement funding is so that you know the ramifications of your decision.
How Settlement Funding Works + What It Can Be Used For
Settlement funding is available to people who have a personal injury case pending. The funder evaluates your chances of winning the case and how much you’re likely to be awarded.
The evaluation includes analyzing the facts of your case and maybe even speaking with your personal injury lawyer regarding the merits of your case so that they don’t end up giving you more money than you’re likely to get in a settlement.
If the funder approves your application, they’ll advance you money to cover things like:
- Basic living expenses
- Rehabilitation expenses
- Medical bills
- Car expenses
- Other expenses
Because the funder will only get their advance settlement back if you win your case, they may be conservative and advance less money than you’re expecting.
The Difference Between Settlement Advance and Loans
While on the surface legal funding may sound a lot like traditional loans, they have some stark differences you need to be aware of.
Personal injury settlement funding requires you to have a lawyer, while traditional loans don’t. If you have a lawsuit pending but are pursuing it yourself, settlement funders won’t approve you. That’s because settlement funders need the lawyer to pay them out of the settlement and don't want the client touching the money before that happens.
Loans are not tied to the outcome of your case, so you’ll need to pay back their money regardless of your final settlement. This also means they look at your credit score and ask for collateral before they approve you for the loan.
You may also have to pay loan payments along the way - even before your case settles. The benefit is that a loan is less expensive for the people who are able to meet the criteria.
Since a settlement advance is “non-recourse” and only paid back if you receive a settlement, the funder isn’t concerned with your credit score and doesn’t require collateral or a credit check. Instead, the funder is concerned with how good your personal injury case is and what it’s worth as they will be entitled to their portion of the settlement, as long as there is one.
Pros and Cons of Settlement Advances
Pre-settlement funding companies can be a godsend to people who are facing mounting bills but lack the credit to get a traditional loan.
They are an especially good option for people who may be thinking about settling a claim early — for less than your lawyer thinks it’s worth — simply to pay bills. In this case, a cash advance on a pending lawsuit may buy you more time to settle it the right way.
The big deterrent in applying for settlement funding is, of course, the high fees and interest. In some instances, the amount of money you have to pay back plus interest and fees may mean that you forfeit your share of the final settlement. That usually makes settlement funding a last resort.
Because this type of funding can be a risk on the part of the funder, they have strict qualifications for the cases they approve. If you use a settlement loan as a last resort, prepare for the possibility of being rejected.
Alternatives to Settlement Funding
Due to the high interest and fees associated with settlement funding, they’re usually seen as a method of last resort. Alternative methods for getting cash for settlements do exist.
- Personal loans: Getting a loan from a bank or other lender is almost guaranteed to cost less than what you’ll pay with a settlement funder. You’ll just need a good credit history to qualify. While no lenders will advertise “lawsuit loans” specifically, if you have a lawsuit and get a loan that’s precisely what it will be.
- Credit cards: While credit cards are known for their high interest rates, they still might cost less than a settlement advance. In some instances, maxing out your credit line may be a preferable option.
- Friends and family loans: Having people you know step in to loan you money is a great way to bypass the messy approval process or high interest rates of other methods. Mighty can even help you facilitate these arrangements by handling the paperwork and paying back the loan out of the settlement.
Exploring these other options before seeking out settlement funding could save you thousands of dollars while achieving the same end goal of bridging the financial gap between your accident and settlement.
So, Should You Get an Advance on Your Settlement?
Now that you know the nuts and bolts of what settlement funding is, you might be wondering if you can make one work in your favor. Here’re some questions to guide your decision:
- How much in fees and interest will you end up paying? Your settlement funder will likely charge you between 30% and 60% per year for the advance. If your case takes 2 - 3 years, you may estimate the amount of money you have to pay back from your settlement will be roughly double what you got. This may be a small price to pay or too great of one.
- How much money do you want from the advance? The rule of thumb in the industry is that your total advances shouldn’t exceed 10% of the value of your case. So if your settlement is expected to be $50,000, you shouldn’t expect to receive more than a $5,000 advance. As with all loans, just because you can receive that much doesn’t mean you should, since you’ll be paying more interest out of your settlement.
- Do you have personal expenses that need to be paid immediately? Keeping a roof over your head and fridge stocked with food is as good a reason as any to get an advance. Only you know your situation and the trade-offs between paying a high interest rate compared to the benefit of being able to pay essential bills.
- Will the advance prevent you from settling your case for less than it’s worth? We’ve seen lots of people rush to settle their cases because they’re desperate for money. That often costs far more than even a high interest rate settlement advance since it can save you from settling for pennies on the dollar.
- Will the advance be used to avoid expensive medical liens? If you can get medical treatment for a small deductible, it may be good to use a cash advance to pay off the debt and receive treatment. The alternative may be to take on medical liens that cost far more than the interest on the advance would cost. This analysis in particular is complicated, and your attorney will need to help you evaluate these options.
- Have you exhausted all other loan options? Once more, one advantage of a settlement advance is that you’re not personally responsible for paying it back as debt if your case isn’t successful. But, in truth, most cases are successful and so paying more for that right may not be the best option for you. Ideally, you could get approved for an advance by other means, including borrowing money from friends and family, getting a personal loan or even putting certain bills on your credit card while you’re waiting for your settlement. If you can, you’ll be able to compare the two options side by side and make an informed decision.
Sometimes a settlement funding is the best option available, but even then you shouldn’t necessarily take the first available offer. You should get at least 3 settlement funding quotes before deciding which one to take.
Having an understanding of what settlement funding is will put you in a position to make it work in your favor.
FAQs About Settlement Funding
Is your lawyer steering you away from settlement funding? Look to these frequently asked questions to learn why that might be and what you can do about it.
What do personal injury lawyers think about settlement funding?
Settlement funders require that your personal injury law firm sign your settlement funding agreement before they’re willing to finalize the agreement. That’s because your personal injury lawyer will be the one responsible for paying off the settlement fund on your behalf with the settlement money from your case.
The vast majority of personal injury lawyers don’t like settlement funding. Here’s why:
- It adds work for them, and they don’t make any more money from you getting it.
- They add liability for themselves by signing the settlement funding agreement, promising to pay the funder out of the settlement before they pay you.
- Their clients get less money at the end of their case after the settlement funder is paid back the principal, interest and fees. Because of this, personal injury lawyers worry the client will think they didn’t do a good job at the end of the case.
- Lawyers don’t like to see their clients pay high interest rates and fees that some settlement funders may charge.
In fact, many personal injury lawyers strongly discourage or sometimes refuse to allow their clients to get settlement funding at all. This is a bit ironic since almost all personal injury lawyers receive financing on their interest in your pending settlement.
What Should You Do if Your Personal Injury Lawyer Discourages You From Getting Settlement Funding?
If your lawyer objects to you seeking out legal funding, here are some steps you can take:
- Explain to them why you need it. It’s possible they aren’t aware of how dire your circumstances are and they might change their position when made aware of it.
- Ask them to recommend a better or less expensive funding option. Your lawyer might have better connections in the industry that will give you a more preferable settlement loan.
- Threaten to change law firms if they don’t go along. If your lawyer still resists cooperating with your wishes, playing hardball may be your only recourse.
- Find a new law firm. Sticking with a self-serving lawyer doesn’t bode well for the rest of your case. Changing to a firm that will represent your interests is the better move.
If I’ve Already Gotten Settlement Funding but Want More, What Are My Options?
It’s very common for people to get multiple advances on their settlement, especially as the value of the case increases as their case matures. Typically you have a few options:
- Go back to the original funder you got the first advance from and ask them to give you more money. If they do, the two advances will typically exist side by side and you’ll have to pay them off separately at the resolution of your case.
- Go to a different funder - maybe because the first funder didn’t approve you for a larger advance. In this case, the new funder will likely have to “buy out” the first funding - which can be especially expensive. One of the reasons this is expensive is that funders have upfront fees and minimum payments. Those will likely compound if one funder buys out the other, costing you even more.
Written ByJosh Schwadron
Chief Executive Officer
About the author
Joshua is a lawyer and tech entrepreneur who speaks and writes frequently on the civil justice system. Previously, Joshua founded Betterfly, a VC-backed marketplace that reimagined how consumers find local services by connecting them to individuals rather than companies. Betterfly was acquired by Takelessons in 2014. Joshua holds a JD from Emory University, and a BA in Economics and MA in Accounting from the University of Michigan.
About the reviewer