If you’ve had pre-settlement funding before and need more money, the company you apply with will need to pay off or buy out your prior lawsuit loan(s). It is an industry best-practice and is standard procedure for most legal funding companies. If you come across a company willing to fund you additional without paying off your first advance, be very wary.
What You Need to Know About Lawsuit Funding Buyouts
A lawsuit funding buyout happens whenever a plaintiff who has previously received a cash advance against their pending settlement needs more money and seeks additional funding from a different company.
They are commonly referred to as “pre-settlement funding buyouts” or a “lawsuit loan payoff” and they are necessary in order to protect the financial interest of the new lawsuit funding company.
Generally speaking, whenever a plaintiff who has received one or more settlement advances on their case needs more money, they will contact a settlement funding company like TriMark Legal Funding.
Part of providing additional cash to the plaintiff is that TriMark will arrange to buy out or pay off whatever amount is owed to the previous funder. The plaintiff’s debt to that company is eliminated and the buyout amount is then rolled into the new funding agreement along with the new cash advance.
For convenience, you can think of it like you’re “refinancing” the old advance to a lower rate and combining it with the new advance to form one convenient new contract.
Why Are Lawsuit Loan Buyouts Necessary?
While some lawsuit funding companies may offer additional advances to their existing clients, it is common practice for many companies to put a limit on either the maximum dollar amount they will fund, the amount of time between advances or the total number of advances they will allow.
Sometimes the plaintiff may have agreed to a very high rate or an un-capped uncapped rate out of financial necessity. Either can cause the balance owed to skyrocket out of control very quickly. In cases like this it is important to refinance to a lower rate as soon as possible.
There are other times when perhaps the plaintiff has grown uncomfortable with their current funding relationship and simply wish to take their business elsewhere.
There are other times when an existing funding company has met their portfolio requirement for that particular type of case and are unable to fund additional at that particular time.
And still others when the funder becomes uncomfortable with the progress of the lawsuit or is simply unwilling or unable to invest additional funds into the case.
All “No’s” Are Not Created Equal
Every lawsuit funding company is unique.
- Unique in how they define risk, the underwriters they employ to evaluate and assess risk, how they determine their threshold for risk tolerance and the types and levels of risk they are willing to accept.
- Unique in the specific types of cases they are willing to invest in.
- Unique in the specific set of states within which they operate.
- Unique in the rates and fees they charge.
- Unique in the terms under which they are willing to advance money.
- Unique in the exact parameters and make-up of their investment portfolio.
And those are just a few.
Just because one legal funding company rejects your case or denies your request for additional funding doesn’t necessarily mean we all will. However, don’t take that as license to shop your case all over the internet because that usually has the opposite effect and devalues the case. You need to be strategic in your efforts and most times the most strategic thing you can do is contact TriMark.
TriMark Legal Funding is frequently able to step in and arrange a buyout and a generous amount of additional funding on good cases even after other companies have said “no”.
Why Only One Lawsuit Funding Lien?
Many companies refuse to do buyouts at all. Others may limit their buyout investment to no more than $5,000 or $10,000.
TriMark Legal Funding is one of the very few companies in this industry that does not have an upper cap on buyouts.
In other words, we would have no problem buying out a $150K to $200K prior funding and then funding an additional $100K if we determine the merits of the case support such funding.
Most funders will insist that you only have one lien against your case for this type of funding.
There are several reasons for doing this. One of them is because there are certain companies in this industry that advertise heavily and only make an initial advance of between $500 and about $2,500 and charge extremely high interest on the first advance, then refuse to issue additional funding.
This forces plaintiffs who need more money to seek out a new funding company to buy them out and fund additional.
Another is because lawsuit lien priority works in much the same way as mortgage liens in real estate do. First priorities get paid back first, then secondary priorities and so on.
The farther back in line a lienholder is, the greater their risk exposure becomes that they may not get paid back in full or paid back at all. Unfortunately, sometimes there just isn’t enough money to go around.
Your attorney will have a lien against your case for attorney fees, case costs, expert witnesses and medical liens (as applicable) for any medical care you received on letters of protection. Legal funding companies will also have a lien to ensure they get paid back after your case settles successfully. A lawsuit funding company’s lien is always subordinate to your attorney’s liens.
Occasionally other liens can pop up for a number of things like medical payments or reimbursements, delinquent child support, unpaid alimony, unpaid federal or state tax liens, unpaid court judgments, etc.
Once the defendant’s insurance company sends the settlement check, your attorney will deposit it in the firm’s trust account. The attorney then pays all of the liens first, in order of priority, and then pays the plaintiff everything that is left.
The problem is that sometimes there may not be enough money to go around. Accruing interest, un-anticipated liens, negotiated medical costs and settling for far less than anticipated are a few of the biggest culprits.
From the perspective of a legal funding company, the order that things are paid after a case settles can be exceptionally important because they are never first. The attorney, case costs, expert witnesses and medical expenses are always paid first.
Why Do Lawsuit Funding Companies Insist on Paying Off the Prior Advance?
If there were 2 lawsuit funding liens on a case, the company who made the first advance would have a senior lien position and first right to be paid ahead of the second company.
This can be problematic if the first lien is large, if it is accruing interest at a high or uncapped rate, if unforeseen liens take precedence, the case takes longer to settle than originally anticipated, or if the settlement amount ends up being less than anticipated. In these situations, the 2nd lien holder is at significant risk of either being forced to accept less than full payoff or nothing at all.
Things to Be Aware of With Lawsuit Funding Buyouts
First, you should be aware that if you have applied for a lawsuit cash advance that will require a buyout, your second advance will likely be under different terms and pricing that could either be better or worse than your original advance.
Historically, TriMark Legal Funding provides some of the lowest rates and most favorable terms in the industry so clients can generally expect a rate reduction and more favorable terms and safety features than the advance that is being bought out.
Second, almost all legal funding comes with a minimum initial repayment term; usually either 3 or 6 months in addition to various underwriting, processing and/or origination fees. For companies that do not have a minimum term, they will usually have something that is effectively a minimum return fee. A minimum return fee can be 20% of the funded amount, even if the advance is bought out within days or weeks of origination. These are features employed by the investor to recoup a guaranteed minimum required return on their investment.
For clients who need more money than the initial company is willing to fund, it should be noted that it is possible to effectively pay double rates and fees for the initial term if you accept additional funding while you are still in the initial term of the first advance.
This is because every buyout will include all fees, interest and any minimum return fees the client agreed to with the first advance.
And third, buying out prior lawsuit loans can be advantageous to clients seeking more favorable rates or terms. It is common for injured victims to be in such dire need of funding that they simply accept the first offer that appears.
Very often it tends to be with one of the aforementioned companies that advertise heavily, have exceptionally high rates and operate on the expectation that they will be bought out within the first couple of months.
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