The Accident, the Injury and the Potential for Financial Ruin

The car in front of you stops without warning. The driver may be talking on a cell phone or reprimanding a disruptive child in the backseat. The reason doesn't matter. What does matter is your life, and those with you, may never be the same.

The result is unthinkable. You sustain life-threatening injuries. You require emergency surgery and are required to endure a lengthy hospital admission, followed by months of painful rehabilitation. You're out of work indefinitely and may never return.

Initially you accept help of friends and family, because you have no choice, but you feel like a burden and your self-esteem begins to falter. You can't pay your bills, and bankruptcy looms on the horizon. Everything you've worked for your entire life hangs in the balance and you have nowhere to turn.

Your lawyer assures you that your lawsuit against the offending driver will eventually be resolved in your favor, but the settlement may be months or years away. In desperation you ask your lawyer to loan you some of the money he plans to recover in the lawsuit, but he tells you that he can't, because it's a violation of the Disciplinary Code.

He reads you the applicable section from the New York Lawyer's Code of Professional Responsibility:

DR 5-103 [1200.22] Avoiding Acquisition of Interest in Litigation.

B. While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the clients:

What recourse do plaintiffs have?

Pre-settlement funding offers a potential solution to this overwhelming problem. Also known as non-recourse funding, a plaintiff may be eligible to acquire a cash advance against his or her anticipated award.

A lawsuit funding company, a third-party unaffiliated with the plaintiff's attorney, provides the proceeds. The funding company fronts money directly to the plaintiff to pay bills, acquire medical services, or use in any way he or she sees fit -- in return for a promise to repay the advance after the lawsuit settles. This is not a loan. It's known as "non-recourse" funding, because the injured person does not have to repay the advance if the lawsuit is unsuccessful.

In other words, if the plaintiff doesn't recover, neither does the funding company. Therefore, it is in the best financial interest of the companies engaged in these practices to choose the cases they wish to fund carefully because there is always a chance that their investment may be lost.

On the other hand, since the funding company is taking a substantial risk in advancing the funds, the fees tied to the advance are usually quite significant.

What steps must plaintiffs take?

The plaintiff takes the first step in contacting the funding company. For instance some companies provide an online application, which contains the vital information necessary for the funding specialist to consider.

A representative of the funding company then contacts the potential client and his or her lawyer. The attorney supplies additional information about the case, and based upon the information provided; the funding company estimates the value of the potential settlement or verdict.

The lawsuit cash advance is offered to the injured person based upon the estimate. The fee may be a flat fee, or a monthly fee that accrues each month the advance remains outstanding.

The injured person has no obligation to repay if the lawsuit is lost. Similarly, if the ultimate settlement or verdict is smaller than anticipated, the amount that must be repaid never exceeds the amount of the injured person's share of that verdict or settlement. Because the attorney runs the risk of losing his investment, these advances are not characterized as loans.

Amounts available vary significantly, depending upon the nature of the case and the company involved. Some companies will fix the fee for the advance up front. Others will charge a monthly fee for each month, from the time the funding is issued until it is repaid, sometimes as high as 15% per month.

Lawsuit funding is not for everyone.

Litigation can take years. While cases are pending, the injured person has to have enough money to get by. If the injured person is unable to work, has reduced income, or has expenses associated with care or disability, it may not be possible to wait until the end of the lawsuit before obtaining funds.

Given the fees involved in pre-settlement funding, which could cause the principle to double over the course of a year or less, it is important for injured people to consider alternatives. Lawsuit financing should be the plaintiff's last resort.

The fees are premised upon the risk to the lender associated with non-recourse lending, but keep in mind that these companies choose their cases carefully in order to minimize their risk. In other words, if they offer you an advance they believe that you will receive money from your lawsuit. If you decide to obtain pre-settlement funding you should check with several companies, in order to obtain the most favorable terms.

Conclusion

Pre-settlement lawsuit funding should be considered at last resort. Due to the high cost of this type of funding, your decision to accept an advance should be made with caution. When seeking pre-settlement funding, it makes sense to check with several companies, to obtain the lowest possible fees.