MECHANICS OF THE LOAN
Since a lawsuit itself is essentially the collateral to secure the finance company’s advances, the lending company will obtain information from the personal injury attorney concerning the case. They will follow these steps to offer the monies:
- Evaluation. The pre-settlement lending company evaluates the case and determines the likelihood of success. If the company is satisfied that there is a strong likelihood of a favorable settlement or verdict, then a cash advance will be approved.
- Agreement. The pre-settlement lending company will expect the plaintiff and the plaintiff’s attorney to sign an agreement. The agreement will require that the attorney release confidential information to the pre-settlement lending company to enable the company to make its evaluation of the request for an advance. The agreement will also require that the personal injury attorney notify the pre-settlement lending company of all settlement offers and execute an acknowledgement obligating the attorney to pay the lender directly from proceeds recovered from the suit.
Since the loan is structured as a non-recourse loan, most states have held that usury laws do not apply.
PUBLIC BENEFITS ISSUES
If the client is receiving means-tested public benefits such as SSI and/or Medicaid, does receipt of the funds pursuant to the terms of the LLA disqualify the client from means-tested public benefits such as SSI and Medicaid? If the funds are received by parents of a child under 18 receiving such benefits, do the funds received under the LLA deemed to the child so as to disqualify the child from those benefits? This becomes a tricky issue. If the funds are considered a loan and there is a reasonable expectation of repayment, then the funds are not considered income in the month received. However, funds kept into the next month will be considered a resource. The issue then becomes whether the transaction is characterized by Social Security and Medicaid as a loan, subject to a reasonable expectation of repayment, or whether it is characterized as a cash advance, which is the categorization made by the pre-settlement lending company to avoid the usury statute. The lawsuit funding company contends that the transaction is non-recourse and therefore not subject to state usury laws. This is clearly an issue that needs to be taken into consideration.
The best practice with respect to pre-settlement lending is to refer the client to a reputable third party to perform the following:
- Identify Lender. The third party would identify the pre-settlement lender after thorough due diligence respecting reasonable rates for the industry and the lender’s reputation for honest dealing.
- Custody Funds. The loan proceeds should be custodied with the third party, who would make disbursements as appropriate.
- Recordkeeping. The third party would keep accurate and detailed records of expenditures from the loan proceeds and maintain receipts for each expenditure.
Best practices dictate that the litigation attorney engages the services of a third party to identify a reputable pre-settlement lender and supervise all aspects of the transaction.
Pre-settlement lending is appropriate if the injured person is unable to work, has reduced income, or has expenses associated with care or disability as a result of the injury. Because of the high fees associated with pre-settlement lending, it should be a last resort. Alternatives to pre-settlement lending might be:
- Personal loans from a relative
- Cash advances on a credit card
- Home equity loans
- Working with client’s creditors to forebear in collection activity until the suit is settled
The Begley Law Group, PC has counseled individuals and families on their financial and legal choices for more than 75 years. Thomas D. Begley Jr., Esquire, CELA, has extensive experience in personal injury, disability law, special needs trusts, Medicaid planning and elder law. He is a member of the New Jersey Bar Association, all relevant state and local affiliates, and the National Academy of Elder Law Attorneys.
For more information:
Begley Law Group
509 S. Lenola Road, Building 7
Moorestown, NJ 08057