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What Is Pre-Settlement Funding?

Renee Booker
Renee Booker

Accident victims often have to wait a significant amount of time before their case is settled or before the case reaches a trial date. In the meantime, the victim may be facing serious financial hardships as a direct result of the accident. In some jurisdictions, pre-settlement funding may be an option to help relieve the financial burden. Similar to other cash advance loan programs, pre-settlement funding offers a loan to victims of an accident who are awaiting a settlement.

The laws and regulations regarding pre-settlement funding will vary by jurisdiction. In most cases, in order to qualify for pre-settlement funding, an individual must have a valid personal injury, or tort, claim pending that has either not reached litigation yet, or has been settled and is awaiting the settlement funds. A contract is usually signed by the lender, the client, and the client's attorney. Careful attention should be paid to the terms of the contract, as terms can vary widely by jurisdiction. Some states within the United States have set forth specific terms that must be included in a pre-settlement funding contract, such as the right to rescind, or change your mind, within a few days after signing the contract.

Businessman with a briefcase
Businessman with a briefcase

Unlike other loans, a pre-settlement funding loan is frequently contingent upon the receipt of a settlement from the personal injury case itself. As such, the borrower often has no obligation to repay the loan if he or she receives no settlement funds, or jury award. Understandably, lenders are very careful about making loans of this type as they want some degree of assurance that a settlement is forthcoming. In most cases, this will require consultation with the attorney representing the victim to ascertain whether it appears as though the victim will indeed win his or her case.

The amount a victim may borrow from a pre-settlement funding lender will depend on a variety of factors. In situations where the settlement has already been agreed upon and the victim is simply awaiting the funds, the calculation is much simpler than in situations where a settlement has yet to be agreed upon. When a settlement has yet to be agreed upon, the maximum loan will be calculated based on the estimated value of the case. The estimated value of the case looks at the amount of actual damages, such as medical bills, that the victim has among other factors in order to make a determination as to what the case is likely to settle for when an agreement is reached.

The cost of a pre-settlement funding loan will also vary by jurisdiction. Common practice is to charge interest every six months on the amount loaned. Some states limit the amount of interest that may be charged to avoid lenders taking advantage of victims when they are particularly vulnerable.

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