How is case cost financing different from pre-settlement funding?

May 20, 2022

May 20, 2022

How is case cost financing different from pre-settlement funding?

Pre-settlement funding (PSF) products offer claimants up-front cash during a pending lawsuit in exchange for an ownership interest in all or a portion of the eventual award or settlement on a non-recourse basis.

So, what, exactly, does that mean?

It means repayment is only due if the financed case or cases succeed. And, subject to contract terms, plaintiffs in cases yielding lower-than-expected recoveries may not have to repay the full amount advanced.

Whether marketed as lawsuit funding, lawsuit loans, lawsuit cash advances, structured settlement loans, third-party consumer litigation financing, non-recourse advances, non-recourse loans, or alternative litigation financing, injured plaintiffs faced with lost income and mounting bills are often drawn to PSF to alleviate economic stress from immediate living and medical expenses. This, in turn, allows them to calmly negotiate or persist in litigation until the case resolves to their satisfaction, rather than caving to a low-ball offer.

Sounds great in theory. But is there a better way in practice?

Unlike PSF, which advances money to plaintiffs to cover personal expenses during the pendency of a lawsuit, case cost financing is lending designed to help lawyers fund the costs of prosecuting their cases.

Below, we discuss why lawyers should advise their clients to approach PSF with caution and how case cost financing, particularly LevelEsq’s Lawsuit Cost Financing (LCF), is different and offers advantages that PSF does not.

PSF Caution: Repayment

When a plaintiff wins or settles a case, PSF requires return of the principal plus fees or interest that may be two or three times the amount advanced.

A CNBC investigation in 2017 indicated that maximum annual rates on PSF ranged from 26.9 to 98 percent. A 2018 study of data from one of the largest consumer litigation funders in the U.S. revealed “various types of interest compounding, minimum interest periods, interest buckets and fees to add costs to the contract,” generating a profit of about 44 percent per year, per case.

Reinsurer Swiss Re’s 2021 report found that lengthy lawsuits incurred higher compound interest on litigation financing and left tort plaintiffs with a significantly lower share of the recovery—43 percent, compared with an average of 55 percent in typical tort liability cases.

These rates, which far exceed those charged by credit card companies, have been cast as abusive and usurious by media outlets and drawn comparisons to payday lending.

LCF Advantage: Flexible repayment

Lawsuit Cost Financing is LevelEsq’s case-specific line of credit for lawyers or firms representing plaintiffs to fund costs and expenses. Repayment rates are transparent and reasonable—from as low as 0.7 percent per month, based on the business credit of the firm and personal credit of the guarantor(s).

Interest accrues only when there is an outstanding balance on the account. And borrowers can choose to pay only interest for the first 18-24 months. If they make a payment greater than the interest accrued during the interest-only period, the amount is applied to the principal balance. Lawyers may also ask LevelEsq to adjust the interest-only period to align with the length of their case.

Repayment of the line of credit balance is due once the award or settlement amount is paid or, in the event of a trial loss or adverse case-ending ruling, the loan can be amortized over up to 36 months.

PSF Caution: Onerous underwriting

Because they only profit from cases that settle or win at trial, pre-settlement funders are discerning about the cases for which they will advance capital.

To estimate the potential return on a case, a funder considers myriad factors, including the reputation and track record of the plaintiff’s lawyer or law firm; the type of case; possible settlement amounts; the case’s projected duration; likely attorney fees and litigation expenses; the plaintiff’s commitment to the case; and the applicable litigation funding rules in the jurisdiction at issue.  

This process may take weeks or months and involve an intrusive review of evidence, including the plaintiff’s medical records, and scrutiny of attorney assessments of the case.

Given this selectivity, plaintiffs may shop several funders before finding one interested in their case, let alone one that adheres to best practices that protect consumers.

LCF Advantage: Quick and easy underwriting

Nearly all negligence cases—except mass tort and class action cases—are eligible for LCF, including medical malpractice, product liability, premises liability, auto/trucking negligence, and business torts.  

Our highly automated underwriting allows us to offer applicants financing in mere hours.

PSF Caution: Largely unregulated

State courts have split on whether to classify PSF products as loans.

Government regulations generally protect consumers from unscrupulous lending practices and enable them to make informed choices and compare terms between lenders. These consumer credit laws cap interest amounts and dictate how lenders disclose loan terms, including how the interest rate is calculated, how much interest the borrower will pay over the life of the loan, the penalties for failing to pay the loan back, and what other fees are included in the loan.

But these laws tend not to apply if PSF is construed as a non-recourse investment or purchase rather than as a loan. Where few, if any, restrictions on interest rates or service fees and requirements for disclosing repayment terms exist, finding suitable PSF for a case becomes even more complicated.

LCF Advantage: Consumer protections apply—but mandatory disclosures to third parties do not.

With LCF, get quick, seamless access to capital for your case. Complete an online application in minutes, and receive an offer at a reasonable repayment rate within hours.  

For no additional fee, enjoy access to our easy-to-use portal, where you can categorize cases, track interest as needed to assist with client billing, and request additional funds as expenses arise.  

Use our money to fund your expensive cases, stop making interest-free loans to your client from your firm’s after-tax dollars, and keep those resources available for expanding your law firm.  

Let LevelEsq help free you from case cost worries with our revolutionary solutions to help you finance your plaintiff litigation, protect your financial investment in your cases, and maximize your firm’s profitability.

How can we help your firm?

Lawsuit Cost Financing

Quick and seamless access to capital to fund your case expenses.

Litigation Cost Protection

Protect the downside with insurance coverage for litigation costs.