Pre-settlement loans are the scourge of plaintiffs’ lawyers for a couple of reasons. The first is that they take so much time—shepherding an application from beginning to end, working out details of the money transfer, and making it all happen in time to help the client with the financial emergency that they are having—it can easily add hours to a case. That wouldn’t be so bad, but for the second reason—loans are often an expensive waste of money for our otherwise deserving clients.
What is a pre-settlement loan?
A pre-settlement loan is a generic term used for money loaned to a client before they are paid from a case. Sometimes they happen when a client is still receiving treatment, sometimes they happen before a lawsuit is filed, and sometimes loans happen after a settlement or verdict is received, but before the money has been paid.
Who pays for a pre-settlement loan?
Lawyers are not allowed to loan money for a very simple reason: it can create a legal conflict of interest with our clients. If I loan a client money, and then we get a settlement offer on a case, I may want very much to accept the settlement offer, because it could mean that I get paid back. If the client doesn’t accept the offer, we may have to go to trial, with all of its attendant risks. Essentially, loaning money to a client creates a property interest in the client’s case, and the risk for the lawyer (and the client) is that the lawyer stops being objective, and has a very personal interest in resolving the case (perhaps for less than its value).
For this reason, clients must get their money elsewhere. There are some reputable businesses out there which will loan money, and there are many disreputable businesses that will loan money. The trick is judging which is which.
How does it work?
Generally, a person who suffers some calamity (automobile accident, slip-and-fall, dog bite, workplace injury, etc…) will ask his lawyer for a loan to help pay for something. It might be the mortgage, car insurance, gas money—whatever bills the client has that he cannot afford. The lawyer may assist the client in searching for a third-party that may be willing to make a loan, or else the client may find a company on his own. The company will need some basic information about the case, and will usually ask the lawyer and client to fill out an application. They want to know if it is a good investment—so they want to know if the liability case is good, if there is insurance, and how extensive the injuries and damages are.
If the company decides to make a loan, they will send a contract with the loan terms. Usually there will be a processing fee (oftentimes several hundred dollars), along with the principal amount of the loan. Added to that will be an interest rate of some kind. The better loans will max out in interest after a period of time—the worse loans will go up and up until a case is resolved.
The client and lawyer will sign at the dotted line, and the money will be given to the client (sometimes by check, direct deposit, or even a pre-paid credit card).
What happens if the case is lost?
If the case is lost at trial, or dropped, the client usually will not have to pay the loan back. There may be an exception if the client drops his own case—for example, the client decides after getting the loan that he no longer wants to proceed with the case. Hypothetically, a loan company may argue that the client did not use best efforts to repay the debt, owes the money despite never getting a judgment or settlement.
Why do lawyers discourage pre-settlement loans?
We discourage pre-settlement loans because, frankly, they are expensive for the client, and also because they make a case difficult to resolve down the road. We have seen loans that require a client to pay back double (and more!) than the amount of principal they were given by the time a case concludes. As the repayment cost increases, it becomes more and more difficult to settle a case, because the client needs a higher settlement in order make the payment and hopefully receive some funds in their pocket.
It is cheaper to take a bank loan, borrow money from friends or family, or to just use a credit card and pay the monthly interest. Pre-settlement loans should generally only be used for true emergencies created by the case itself—for example, someone who lost time from work because of an automobile collision would take money to pay necessities. For clients who do take loans, we recommend taking the bare minimum necessary.