Legal funding companies provide cash to injured persons who need a financial boost. Their clients are injured people who have a pending lawsuit or an existing structured settlement. The company advances money that is to be paid back only if the lawsuit is successful. For a structured settlement advance, the injured party agrees to assign to the company their rights to any pending future payments.
Once a person decides to seek an advance against all or part of their settlement, they submit a no fee application. After that, Legal funding companies say that within a very short turnaround time they will evaluate the case, make a decision and have the necessary paperwork ready for execution.
Legal funding companies, also known as pre-settlement funding companies, make loans on a no-recourse basis, which means if a person doesn’t win their case, they have no recourse for getting the money back. They must therefore base their decisions on the quality of the case and the inherent risks of each personal injury lawsuit. It’s an easier decision with a structured settlement.
Structured settlements
With a structured settlement advance, there is already an existing settlement in place. When the injured person settled their case, they made a decision to accept their money in an annuity style arrangement. Structured settlements usually include an upfront lump sum payment coupled with monthly, quarterly or annual payments over a number of years or a lifetime.
When a person seeks an advance against their structured settlement, they must assign their rights to the legal funding company. In exchange for relinquishing their rights to future payments, the injured person receives a lump sum to do with as they please. The legal funding company is then entitled to receive the installments that would have been paid to the injured party. These types of cases come with limited risks to the funding company. As a settlement is already in place, they will collect money on a regular basis, at least until the injured person dies or his benefits expire.
Lawsuit funding
With structured settlement funding, the company knows they will receive some money. With a lawsuit in progress, they can try to asses the risks, but it’s pure speculation. Lawsuit funding companies advertise that they will advance money that the injured person doesn’t have to pay back if their suit is not successful. They will only advance money after reviewing case documents from the injured person’s attorney and assessing the risks. They will agree to the advance only if the injured party has a case they believe to be winnable in the end.
Many court cases settle as their jurisdictions require good faith settlement efforts on behalf of both parties or settlement attempts through court-ordered mediation. If the parties do not settle and the case goes to a jury, they may see things differently and render a low judgment or no judgment at all. If the case is in its early stages, it may take years to make it through the litigation process. Legal funding companies are taking a risk when they agree to any advance of a case in litigation, although the risks may seem minimal under certain circumstances:
-If the injured party has received an offer of settlement, the funding company may see that as a possibility that the case will settle eventually.
-If the liability is very clear, it may mean little risk if they make an advance.
-If The case is in appeal solely for the amount of damages and not liability, the funding company may see that as a guarantee of a future payment, especially if there is a deep pocket defendant or large dollar insurance policy.
Is it gambling?
Regardless of what the legal funding companies call what they do, their business has the element of gambling. With structured settlements, the longer the injured party lives, the more payments the company will receive, up to the limit of expiration of the annuity or the injured person’s death. The funding company is essentially placing a wager on the injured party’s chances of dying later rather than sooner.
When they advance funds against a pending court case, they are gambling that the plaintiff’s attorney will be successful in winning the case or getting a settlement. In either case the funding company becomes a questionable third party with a financial interest in the outcome of the case.