If you have been injured in an accident or experienced harm in your workplace, you may have a right to compensation through a personal injury lawsuit. However, lawsuits can drag on for months or even years before a settlement is reached. During that time, you still have bills to pay and financial hardships that don’t go away just because your case hasn’t yet settled.
This is where settlement funding companies come in. They provide money upfront to plaintiffs who have lawsuits pending but have not yet received their settlement amounts. While this cash advance can provide much-needed relief, the companies charge often substantial fees on the money provided.
In this post, we’ll look at what exactly these settlement funding fees are, why companies charge them, what influences how high or low they are, whether exceptionally high fees could ever make sense for a plaintiff, and tips for those dealing with a settlement funding company so that the fees don’t end up capturing more of your eventual settlement than necessary.
What Are Settlement Funding Fees?
Settlement funding companies, also often referred to as settlement loan companies or pre-settlement funding companies, advance money to plaintiffs to use as they wish prior to the resolution of their case. In exchange for this money provided upfront, the companies take a cut of the eventual settlement amount.
The percentage that the funding companies take is the settlement funding fee or rate. While there is no standard fee across the many settlement funding firms, fees often range from 2-5% assessed monthly. So if you receive $30,000 from a settlement funder and have that money for 12 months before your case settles, you may pay anywhere from 24% to 60% of that $30,000 back to the company.
Settlement funding companies protect themselves from loss by putting liens on any future settlement the plaintiff receives or requiring repayment out of the settlement. So the fee is not simply interest on a cash loan – it comes directly out of the total settlement amount that the plaintiff eventually receives to conclude their case.
Why Do Funding Companies Charge Fees?
The most straightforward reason that settlement funding companies charge substantial fees is that this is how they sustain their businesses and turn profits to provide returns to their owners and investors.
They have overhead costs involved with evaluating cases, determining appropriate funding amounts, processing applications, distributing funds, tracking repayments, pursuing collections when needed, and other general costs of running operations. The multi-percentage fees account for these costs and also build in a level of profit margin, just like any business.
However, unlike lending money for auto loans, mortgages or business loans where there is collateral behind the loan, the settlement funders are taking on more risk by providing money without firm repayment guarantees. There is always a chance that the recipient loses their court case and then would be unable to repay the funds advanced to them.
So part of the fees also compensate the funding companies for tying up money that they likely borrowed themselves at interest rates, rather than being able to put it into less risky investments or ventures during the months or years a case continues.
The fees provide room for profit, while also accounting for the number of cases settlement firms take on that end up losing in court and unable to make full repayments on the cash advances provided.
What Factors Influence Settlement Funding Fee Amounts?
Settlement cash advance companies often state that their fee amounts are determined on a case-by-case basis. However, generally the following factors come most into play when determining what percentage fee they will charge:
- Amount being advanced – The more total money provided upfront, the higher the fees assessed may be. Fees on small dollar amount advances could start below 3% monthly rates. For advances above high 5-figures or into 6-figures, rates of 4% or higher become more common.
- Length of time until resolution – The longer a case is expected to remain until settlement, the more risk the funding company faces in not having their capital repaid promptly. So advances they expect to be outstanding a year or more often have higher associated fee rates.
- Risk level of the case – Each funding company does some level of assessment of the claim merits, evidence, legal posture, juridical history with similar cases and other factors that feed into determining risk. Weaker cases or cases in known plaintiff-unfriendly jurisdictions will be seen as riskier with higher fees charged. Strong cases with good documentation, reliable legal counsel and history of favorable plaintiff outcomes can receive lower fee rates.
Are Exceptionally High Fees Ever Justified?
Settlement funding fee rates have certainly received criticism at times for being excessively high given the type and duration of risk faced by companies on certain cash advances. Consumer advocacy groups often argue that the companies take advantage of already distressed plaintiffs who have urgent financial needs during difficult periods.
However, the counterargument exists that in extremely lengthy, complex and uncertain cases, the higher fees account fairly for the actual risk and use of capital over time periods stretching years. Without the eventual large payoff in some small portion of very high risk cases, the settlement funding business model would not sustain profitability.
So while on certain types of straightforward injury claims with liability already established, fees of 5% or more monthly could rightly draw criticism, in select scenarios – perhaps a complex medical liability case involving an uncommon disease process and disagreement on causality –a higher fee structure reflects rational business risk-reward considerations.
Of course each plaintiff dealing with settlement funding companies still needs to closely evaluate what makes sense in their unique situation. But it is worth understanding that exceptionally high fees are not necessarily unfair profiteering in all cases.
Tips for Plaintiffs in Dealing with Settlement Funders
For any plaintiff facing financial hardship while their court award remains pending, utilizing cash advances from settlement funding firms can provide real relief on obligations and pressing needs. However, being an informed and discerning consumer reduces the chances of the already financially distressed plaintiff letting fees eat up more of their eventual pot of money they deserve than necessary.
With that goal in mind, here are some tips for plaintiffs to make the best use of settlement funding that circumstance allow:
- Shop settlement funding offers and fee terms – Do not simply accept the terms of the first settlement funder you come across. Different companies utilize different business models that price fees and risk differently. Shopping proposals involving your case specifics can reveal a range of options.
- Read the fine print closely – Funding companies are masters at making fee explanations and contract language overly complex. Commit to slow down and understand clearly what total repayment looks like under various scenarios. Get clarity on when fees stop accruing if a case drags out longer than initial estimates.
- Ask plenty of questions – If any part of the fee structure or contract seems opaque or complicated as you try reading through, get clarification from the funding representative. Never feel embarrassed to ask for simpler explanations.
- See if pro bono representation is attainable – If a law firm believes highly enough in your case merits, some may cover case costs in exchange for taking more of the judgment portion later or arrange other alternatives involving no repayment risk on your part.
- Discuss options with your legal counsel – Your lawyer wants you to receive as much of the settlement you deserve as possible. Walk through the settlement funding scenarios with them, as they have good perspective on likelihood of timings, winning some reimbursements of legal costs later that reduce your repayment amounts, and other aspects that impact evaluating funding approaches.
The Perfect Solution Rarely Exists
When injuries or harm occur that were not your fault and leave you footing unanticipated bills while waiting on the civil justice process to play out, easy solutions seldom exist. Settlement funding companies fill an important need for many plaintiffs at particularly difficult times.
However, as with financing answers in other contexts, there are always trade-offs between getting money now versus preserving money later. Appreciating what goes into pricing of settlement funding fees, when higher charges make sense and may not, and taking the time to shop options rather than jumping at the first life raft, enables plaintiffs to better balance meeting today’s hardships with financial issues still lingering after resolutions finally come.
There are no cookie cutter answers on what is best for each person’s unique legal situation and life circumstances. But avoiding potential pitfalls around settlement funding fees can provide some empowerment amidst circumstances that already disempowered victims of harm or injustice. Knowledge and eyes wide open, fully understanding the implications of money provided today against money lost tomorrow, makes finding the least-bad path forward simpler.
