Claim: Settlement loans give you a cash advance against an expected legal settlement.
Claimed By: Credit Karma
Fact Check: This statement is inaccurate as it misapplies the legal concept of a loan, especially regarding consumer legal funding. There are crucial differences between pre-settlement funding and “settlement loans,” which makes this a self-conflicting statement. In general, the concept is as follows:
- Pre-settlement funding is a non-recourse purchase agreement between a buyer and a seller. The contract involves the funding company placing a lien against the claim’s expected (potential) settlement or court award monies.
- The above means it cannot be a loan since there is no absolute repayment of the money advanced to the claimant. The legal funding company cannot expect payment for its “ownership amount” if the case does not reach a favorable outcome–the case is lost, and no money is recovered.
In contrast to non-recourse funding, “settlement loans” are loans with repayment not contingent on the claim’s proceeds.
Instead, the financing is a recourse loan directly to the claimant, which is the case in several states.
Also, there are types of claims that state law (for some, it is federal) define as being non-assignable, meaning they can’t be sold to another party/have liens placed on the claim’s potential proceeds.
Workers’ Compensation is a non-assignable claim, making it against the law and technically impractical to receive non-recourse pre-settlement funding against it.
However, in states that define the product as a recourse “settlement loan,” it is possible for companies to extend the funds with repayment not contingent upon the claim’s potential proceeds, and they still have a lien on the borrower even if there is not a favorable outcome for the client.
From a realistic perspective, companies generally do not try to collect in those situations, although they cannot promise that to be the case.
Fact Check By: Express Legal Funding
