For many accident victims, waiting two or three years for a settlement from a personal injury claim seems to be an unreasonable delay. After all, a dollar today is generally worth more than that same dollar in three years from now. A simple solution appears to be calling up a settlement funding company and taking out a small loan to ease any financial burdens in the short-term. However, taking out a settlement funding loan against your personal injury case is almost always against your best interests.
In the last decade or so, a host of settlement funding companies have sprouted like mushrooms, creating a crowded marketplace with high advertising budgets. The offer seems too good to be true—get paid now for the money you may or may not be getting out of your settlement in the future, and at very low interest rates. However, the first rule for consumers is always caveat emptor—meaning “buyer beware.”
It’s true that the settlement funding companies do not make much at all off of interest on their loans. Often their interest rates are much better than local banks on small loans. This is purposeful, as the way they make money is off of the fees they charge their borrowers, which are often either hidden or not well disclosed. As these are not typical bank loans, the area is almost completely unregulated by the government, allowing companies to charge whatever they wish at the end of a case.
One example of the type of fee charged is an “evaluation fee.” Often given different names by different companies, they will charge you a fee for getting information from you and your attorney in their attempt to “evaluate” the potential value of the case. After all, they have to have some idea of the potential value of your case before they make you a loan. Unfortunately, the fees are often exorbitant, especially when the person conducting the evaluation is often not an attorney, has no litigation experience, and more often than not are not based out of New Jersey.
In addition to charging upfront fees, there are also often periodic “case status” fees. This is a fee on the loan which is charged either every so often (monthly, quarterly, etc.) or with some companies every time they contact your attorney’s office to check on the status of your case. You can imagine if they are calling monthly over two years to check if the case has settled, that would be 24 extra fees on your loan, which can add up to thousands of dollars by the time the case resolves.
Small loans can often grow substantially by the end of a case. In one example, documented by the New York Times in July 2011, a Georgia man borrowed just $9,150 from a settlement funding company. When his case settled 18 months later, he owed back $23,588 to the company from which he took the small loan. See http://nyti.ms/1Rw1hZ1. If that same gentleman had taken out a personal loan from a local bank at a high interest rate of 10% APR, he would have owed back approximately $10,522.50 after 18 months. So by choosing the settlement funding service, he paid a premium of over $13,000.
Advocates of legal funding services would argue that the benefit of settlement advancements are that they are often contingent upon the outcome of the case. Many companies offer loans which are only required to be paid back if the claimant is “successful.” So you can have situations where a claimant “wins” their claim and is awarded the cost of medical bills and a small amount for pain and suffering. The loan company may not care that some of the award was for medical bills and still attempt to seek repayment out of the lawsuit proceeds. This money would have to be paid back regardless of the recovery because the claimant would be considered “successful” in proving liability and getting a recovery.
One last consideration is that you are not allowed to make a claim for any amounts borrowed against your claim. The value of your case, or in legal parlance the amount of your damages, is set by the Court Rules which do not permit claimants to make claims for loans of this nature. So in negotiating any potential settlement on your claim, your attorney must ignore any outstanding loan balances owed on settlement advances because they are not compensable.
If you find yourself in a situation where you are considering taking out an advancement on your potential settlement, speak with your attorney about the various other options available so that you can maximize the amount you net from any potential award or settlement.