When you've been hurt in an accident and the bills are piling up, a lawsuit loan — technically called 'litigation funding' or a 'pre-settlement advance' — can seem like a lifeline. And sometimes it is. But before you sign anything, you need to understand exactly what you're getting into, because these loans can eat into your settlement in ways you might not expect.
First, let's be clear about what a lawsuit loan is. It's a cash advance against your future settlement. The funding company gives you money now, and when your case settles, the advance plus fees and interest gets paid back out of your settlement proceeds. If your case doesn't settle or you lose at trial, you typically don't have to pay the money back. That's the upside.
The downside is the cost. Lawsuit loan companies charge interest rates that would make a credit card company blush. We're talking rates that can translate to 30, 40, or even 60 percent annually when you factor in all the fees. On a case that takes two years to settle, a $5,000 advance could turn into $12,000 or more that gets deducted from your settlement. I've seen clients get shocked at the closing table when they realize how much of their settlement went to pay back the funding company.
My advice? Exhaust every other option first. If you're in a workers' comp case, make sure you're getting your TTD benefits. If you're in a personal injury case, see if your health insurance or auto insurance medical payments coverage can help with the bills in the meantime. Talk to your creditors about hardship deferments. Some hospitals and medical providers will put your account on hold if they know you have a pending injury case.
If you absolutely need a lawsuit loan to keep the lights on or to avoid losing your car, then take the minimum amount you need and no more. And read every word of the agreement before you sign it. Better yet, have your lawyer review it. We've negotiated reductions on lawsuit loan payoffs for our clients before, and sometimes we can steer you toward a funding company with lower rates.
Bottom line: a lawsuit loan isn't free money. It's expensive money that comes out of your settlement. Before you take one, call us at 312-500-4500 and let's see if there's a better option for your situation.
The interest rate is super high. So usually the interest rate is in the 20s or thirty percent per year. And many of the lawsuit loan companies, the interest compounds monthly. So basically, what they do is they take three or four percent interest per month and add the principal at the end of the month. So in other words, sometimes it compounds even faster than that. That's why they always make you sign a 12-page agreement with tiny little type in it every time you take out a lawsuit loan. That's why I tell people not to do it.
Here's one, it's okay to take out a lawsuit loan if you are injured and you don't have money coming in and you need to pay the rent. It's something important, I mean I literally tell people, is there anyone else you can borrow money from? You're better off taking out a mortgage on your house, you're better off borrowing money from a friend or a family member than you are taking out a lawsuit loan. Because whatever they charge you is almost certainly going to be less money than you're going to pay paying back a lawsuit loan.
However, if you're really in an emergency, this is what I tell clients. I am NOT walking in your shoes. If you really feel like you have nowhere else to turn and you absolutely need money, then it's okay to take out a lawsuit loan. But if you're taking out a lawsuit loan because you want to take your kids to Great America. Or it's your kids birthday party and you want some extra money to throw them a big birthday party, or you want to go out and buy a new car, or you want to take the family on vacation and you're short on money.
That is a terrible reason to take out a lawsuit loan. Because the ultimate amount it's going to cost you is ridiculous.That's really the essence of lawsuit loans. Whenever anybody calls me and says hey I need a loan, of course it's illegal for lawyers to lend money directly to their clients. That's why I lawsuit loan companies popped up. So if you ask your lawyer for a loan and the lawyer says no, it isn't because your lawyer is mean and they're not lying to you, they're telling you the truth they're not allowed to lend you money.
But a lawsuit loan company can. But it's usually a terrible idea based on how much money they end up taking out of your settlement. I have people who, in a smaller case will take out a lawsuit loan, will file a lawsuit, we'll fight the case for a really long time. And then before you know it, most of the money in the lawsuit gets eaten up by the lawsuit loan amount that they want repaid.
So, bad news, avoid them if you can. But if you need, one here's what you need to look for. A low interest rate and you want non-recourse lending.
Non-recourse lending means if you lose your lawsuit you don't pay the money back. It's just like the way you hire me, if I don't win your lawsuit, I don't get paid. A recourse loan means that you owe them the money no matter what. A non-recourse loan means if you don't get money from your lawsuit, the lawsuit loan company doesn't get paid.
A lawsuit loan - also called pre-settlement funding or litigation funding - is a cash advance against the expected proceeds of your personal injury case. You receive money now and repay it from your settlement, typically with very high interest rates. Unlike a traditional loan, repayment is contingent on winning - if you lose, you owe nothing. They are not technically loans under Illinois law, which is why they aren't subject to normal lending regulations. This lack of regulation is where the problems start.
The interest rates are frequently predatory - some lawsuit funding companies charge 40 to 60 percent annually or more, compounded. An advance taken early in a case that takes two years to resolve can multiply several times by the time the case settles. This dramatically reduces your net recovery. It can also create pressure to settle early - once you've taken a loan, the interest is running and you may feel financial pressure to accept a lower offer to close the case. I strongly advise clients to exhaust all other financial options before considering lawsuit loans.
Only as a last resort when you have no other way to meet essential living expenses - rent, utilities, food - and when your case has high value and strong liability. The calculus changes in very strong cases with large expected recoveries where the loan is a small fraction of the total. Before taking any lawsuit loan, discuss it with me. I can often help clients identify alternatives, and if a loan becomes unavoidable, I know which companies are less predatory than others.
It shouldn't legally, but practically it can create pressure. Once loan interest is running, the temptation to settle early and stop the interest clock is real. This is one more reason to be cautious. I will always pursue the best possible result for your case regardless of your financial situation - but I can't override the settlement pressure you feel if you've taken on expensive funding. Call me before you take any lawsuit loan: 312-500-4500.
Illinois ethics rules prohibit lawyers from lending money to their clients during representation - it is considered a conflict of interest. If a lawyer were financially tied to you through a personal loan, their judgment about settlement timing and case strategy could be influenced by getting their money back rather than by what is best for you. That is exactly why the lawsuit loan industry exists - to fill the gap that ethics rules create. When your lawyer says no to lending you money, they are not being unhelpful. They are following the rules that protect you.
Non-recourse means if your case loses, you do not owe the money back. The lawsuit loan company takes the risk that the case might not pay out - and that risk is priced into the high interest rate. Recourse loans, by contrast, would require you to repay no matter what happens with the case, which would put your other assets at risk. If you take a lawsuit loan, insist on non-recourse terms. Read the contract carefully - some companies blur the line and try to claim recourse rights in certain situations.
Yes - and you should exhaust them first. Check whether your health insurance or auto MedPay coverage will pay medical bills in the meantime. Ask medical providers to hold their bills until settlement (many will, with a lien). Negotiate hardship deferments with credit card and utility companies. Borrow from family or a credit union at normal rates. Apply for short-term hardship benefits if you qualify. Even a home equity line or a 401(k) loan typically costs far less than a lawsuit loan. Lawsuit loans should be the last option, not the first.
Sometimes, yes. Lawsuit loan companies will often accept a reduced payoff to get a quick, certain check rather than risking the case taking longer or settling for less than expected. I have negotiated lawsuit loan reductions for clients many times. It is not guaranteed - some funding companies will not budge - but it is always worth the ask. If you already have a lawsuit loan outstanding and your case is approaching settlement, call me at 312-500-4500 to discuss whether reduction is possible in your case.
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If you or a loved one is dealing with a situation like this, give us a call any time, day or night. We are here to help. 312-500-4500
Scott DeSalvo founded DeSalvo Law to help injured people throughout Chicago and surrounding suburbs. Licensed to practice law in Illinois since 1998, IARDC #6244452, Scott has represented over 3,000 clients in personal injury, workers compensation, and accident cases.
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