There is an ever-growing cottage industry of investors ready, willing and able to make the equivalent of a loan to an individual who is the plaintiff in a personal injury case. These transactions, also known as pre-settlement lending, are a growing trend for those in need. In order to avoid usury statutes, these transactions are characterized not as loans but as non-recourse cash advances. If the plaintiff loses the lawsuit, then no repayment is due. If the plaintiff receives less than the outstanding balance of the loan, then only the amount that the plaintiff receives need be repaid. Because of the high risk associated with these transactions, the equivalent of an interest rate is fairly high.
A number of issues arise in connection with these loans including legal, ethical, Medicaid and practical concerns that must be considered in determining whether applying for such a loan is appropriate.
PURPOSE OF THE LOAN
The purpose of pre-settlement lending is usually to enable the injured party and/or his family to meet their living expenses during the period of time when the lawsuit is pending.
LOANS INVOLVING MINORS AND INCAPACITATED PERSONS
If the lending agreement is made directly with the injured adult plaintiff, it is much easier than if the lending agreement is made with parents on behalf of a minor child or an incapacitated adult plaintiff whether acting as natural guardian or legally-appointed guardian of the plaintiff. In cases involving a minor or incapacitated plaintiff, many courts will refuse to enforce the terms of the lending agreement, unless it can be clearly demonstrated that the funds were used for the direct benefit of the injured minor or incapacitated person. Excellent recordkeeping is critical.
For example, if a parent misses considerable time from work superintending a catastrophically injured child and falls behind in mortgage payments, a court may question whether a pre-settlement lending agreement used by the parent to bring the mortgage payments current was for the direct benefit of the child and, therefore, enforceable. On the other hand, if the parent is the injured party, unable to work because of the injury, and assuming the pre-settlement lending was used to make mortgage payments, there should be no enforceability issue based on the fact that the “borrower” does have an interest in the lawsuit.
In most situations involving a loan, the borrower’s credit is paramount. Even if the loan is secured by a real estate mortgage, most lenders will want to see that the borrower is credit-worthy because of today’s sensitive lending environment. In pre-settlement lending transactions, the borrower’s credit is immaterial, because the pre-settlement lending company is looking to the proceeds of the lawsuit as collateral for the loan.
The Begley Law Group, PC has assisted individuals and families with their legal and financial decisions for more than 75 years. They are highly respected for their successful track record and attention to their clients’ needs first and foremost. Thomas D. Begley Jr., Esquire and CELA, has extensive experience in personal injury, disability law, special needs trusts, Medicaid planning and elder law.
For more information:
Begley Law Group
509 S. Lenola Road, Building 7
Moorestown, NJ 08057