This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.

When plaintiffs become involved in personal injury lawsuits or other civil litigation, the wait for a settlement or verdict can stretch for months or even years. During this time, medical bills accumulate, living expenses continue, and financial pressure mounts. Many turn to pre-settlement funding—also known as lawsuit loans or legal funding—to bridge this gap. But what happens when circumstances change and a plaintiff wants to buy out their existing funding agreement? This is where pre-settlement funding buyouts come into play.

What is pre-settlement funding?

Before diving into buyouts, it’s essential to understand the foundation: pre-settlement funding itself. Pre-settlement funding is a financial transaction where a plaintiff receives cash advances against their expected lawsuit settlement or judgment.

• Unlike traditional loans, these advances are non-recourse, meaning the plaintiff only repays the funding company if they win their case or receive a settlement.

• The funding company evaluates the merits of the case, the expected settlement amount, and the likelihood of success before offering an advance.

• Typically, plaintiffs can receive anywhere from a few thousand dollars to hundreds of thousands, depending on the case’s projected value.

• In exchange, the funding company receives a portion of the eventual settlement, which includes the principal amount advanced plus fees and interest that accumulate over time.

This type of funding has become increasingly popular among plaintiffs in personal injury cases, medical malpractice suits, employment discrimination claims, and other civil litigation matters. It provides crucial financial relief when plaintiffs cannot work due to injuries or when they need resources to continue fighting their case without accepting a lowball settlement offer.

What is a pre-settlement funding buyout?

A pre-settlement funding buyout occurs when a plaintiff who already has an existing pre-settlement funding agreement pays off that agreement—either partially or in full—before their case settles. Alternatively, it can refer to situations where a new funding company purchases or “buys out” the existing funding contract from the original company, often providing additional funds to the plaintiff in the process.

There are generally two types of pre-settlement funding buyouts:

1. Direct buyout by the plaintiff: The plaintiff obtains money from another source—whether personal savings, family loans, traditional financing, or other means—to pay off their existing funding agreement and release the lien on their settlement.

2. Third-party buyout: A second pre-settlement funding company buys out the first company’s position in the case. The new company pays off the original advance plus accumulated fees and interest, and the plaintiff may receive additional funding. The new company then holds the lien on the settlement, though often at potentially better terms.

Understanding buyouts requires recognizing that pre-settlement funding agreements create a lien or assignment of proceeds on the plaintiff’s settlement. The funding company has a contractual right to be repaid from the settlement proceeds before the plaintiff receives their portion. A buyout essentially transfers or eliminates this lien.

Why would you consider a pre-settlement funding buyout?

Several circumstances might lead a plaintiff to pursue a buyout of their existing pre-settlement funding agreement:

• Reducing overall costs: Pre-settlement funding can be expensive, with fees and interest accumulating over time—sometimes at monthly compound rates ranging from 2% to 4% or higher. If a case drags on for years, the amount owed can grow significantly, potentially consuming a large portion of the eventual settlement. A buyout allows the plaintiff to stop this accumulation, potentially saving substantial money.

• Accessing better terms: The pre-settlement funding industry has evolved considerably, and competition has increased. A plaintiff who obtained funding early in their case might find that newer companies offer better rates or terms. By having a new company buy out the old agreement and provide additional funding, the plaintiff might secure more favorable conditions.

• Consolidating multiple advances: Some plaintiffs receive multiple advances from different funding companies throughout their case. Managing multiple liens and accumulated costs from various sources can become complicated. A buyout allows consolidation of all existing funding into a single agreement with one company, simplifying the repayment process when the case settles.

• Changing financial circumstances: A plaintiff’s financial situation might improve during the litigation. They might receive inheritance money, secure employment, or obtain traditional financing that wasn’t available earlier. Using these resources to buy out the funding agreement eliminates the lien and preserves more of their eventual settlement.

• Settlement negotiations: As settlement negotiations progress, plaintiffs and their attorneys gain clearer pictures of the expected settlement amount. If the accumulated funding costs threaten to consume too much of the settlement, a buyout might make strategic sense to maximize what the plaintiff ultimately receives.

• Relationship or service issues: Occasionally, plaintiffs experience problems with their funding company—poor communication, billing disputes, or other service issues. While rare, these situations might motivate seeking a buyout with a different, more reputable company.

How does the buyout process work?

The buyout process typically follows several key steps, though the exact procedure can vary depending on whether it’s a direct buyout by the plaintiff or a third-party company buyout:

• Assessment and documentation: The process begins with the plaintiff reviewing their existing funding agreement to understand the current balance owed, including all accumulated fees and interest. They’ll need copies of the original funding contract, any amendments, and statements showing the current payoff amount.

• Contacting the current funding company: The plaintiff or their attorney contacts the existing funding company to request a payoff quote—the exact amount needed to satisfy the agreement and release the lien. This quote is typically valid for a specific period, often 30 to 60 days.

• Exploring buyout options: If pursuing a third-party buyout, the plaintiff or their attorney shops around to different pre-settlement funding companies. They’ll need to provide information about their case, the existing funding agreement, and the current payoff amount. Companies will evaluate whether buying out the existing lien and potentially providing additional funding makes business sense.

• Comparison and negotiation: For third-party buyouts, the plaintiff compares offers from different companies, examining factors like additional funding amounts, fee structures, total costs, and contract terms. Negotiation may occur to secure the best possible terms.

• Attorney review and approval: Because pre-settlement funding involves the plaintiff’s legal case, their attorney typically must review and approve any buyout arrangement. Many funding contracts require attorney acknowledgment or consent. The attorney ensures the buyout serves the client’s best interests and doesn’t jeopardize the case.

• Execution and fund transfer: Once terms are agreed upon, the buyout is executed. For third-party buyouts, the new funding company wires payment directly to the original company to satisfy the debt. The original company releases its lien, and the new company’s lien takes its place. If additional funds are being provided to the plaintiff, those are disbursed according to the agreement.

• Documentation of lien release and new agreement: Proper documentation is crucial. The original funding company must provide written confirmation that their lien is released and they have no further claim on the settlement. If there’s a new funding company involved, the plaintiff signs a new agreement, and the new lien is properly documented.

A few things to consider before pursuing a buyout

While buyouts can offer advantages, plaintiffs should carefully consider several factors before proceeding:

• Total cost analysis: Calculate the total cost of buying out the existing agreement versus letting it ride until settlement. Consider the payoff amount, any prepayment penalties, and compare this to what would be owed if the funding continued until the case resolves. Factor in how much longer the case is likely to take.

• Terms of the new agreement: If pursuing a third-party buyout, scrutinize the new funding agreement carefully. Ensure the terms are genuinely better than the existing arrangement. Look at interest rates, fee structures, compounding frequency, and any additional charges. Sometimes what appears to be a better deal initially may not be in the long run.

• Hidden fees and penalties: Some pre-settlement funding agreements include prepayment penalties or buyout fees. These can add thousands of dollars to the payoff amount. Read the original contract carefully or have an attorney review it to understand all costs associated with early repayment.

• Impact on settlement timeline: Consider how long until the case is likely to settle. If settlement is imminent—within a few weeks or months—the savings from a buyout might be minimal compared to the effort and potential costs involved. Conversely, if the case will take another year or two, a buyout could result in significant savings.

• Additional funding needs: Realistically assess whether additional funding will be needed before the case settles. If more advances will be necessary, determine whether the buyout makes sense or whether consolidating everything later might be more efficient.

• Attorney input: Always involve your attorney in buyout decisions. They understand your case’s value, timeline, and complexities. Their insight is invaluable in determining whether a buyout serves your best interests.

• Reputation of new funding company: If working with a new funding company for a buyout, research their reputation thoroughly. Check reviews, Better Business Bureau ratings, and whether they’re members of industry associations like the Alliance for Responsible Consumer Legal Funding (ARC). Avoid predatory companies offering unrealistic terms.

• Tax implications: While pre-settlement funding is generally not considered taxable income (it’s an advance on money you’re owed, not new income), buyouts can have complex financial implications. Consult with a tax professional if significant amounts are involved.

The costs associated with buyouts

Understanding the financial implications of buyouts is crucial for making informed decisions. Several types of costs may be involved:

• Accrued balance on original funding: The primary cost is the current balance owed on the existing funding agreement. This includes the original principal amount advanced plus all accumulated interest and fees up to the buyout date. Depending on how long the funding has been in place and the rates charged, this can be substantially more than the original advance.

• Buyout or prepayment penalties: Some funding agreements include clauses requiring additional fees if the agreement is paid off early. These penalties compensate the funding company for the lost opportunity to continue earning fees. Penalties might be a flat fee or a percentage of the outstanding balance.

• Administrative fees: Funding companies may charge processing or administrative fees for handling a buyout. These typically range from a few hundred to a few thousand dollars, depending on the company and the complexity of the transaction.

• New funding costs: If obtaining a third-party buyout with additional funding, the plaintiff takes on new costs associated with the new agreement—initial fees, ongoing interest, and other charges that will accumulate until the case settles.

• Attorney review fees: While many plaintiff attorneys provide case-related advice as part of their contingency fee arrangement, some might charge separately for reviewing buyout agreements, especially if substantial time is required. Clarify this with your attorney beforehand.

• Opportunity costs: There’s also an opportunity cost to consider. Money used for a direct buyout could potentially be used for other purposes. Weigh whether paying off the funding now is the best use of available resources.

Despite these costs, a well-structured buyout can still result in net savings if it prevents months or years of additional fee accumulation on the original agreement.

The role of attorneys in buyouts

Plaintiff attorneys play a crucial role in the buyout process and should always be involved:

• Case evaluation: Attorneys provide realistic assessments of case value and settlement timing, essential information for determining whether a buyout makes financial sense.

• Contract review: Attorneys review both the existing funding agreement and any proposed new agreements, identifying unfavorable terms, hidden fees, or problematic clauses that could harm the client.

• Negotiation: Experienced attorneys often have relationships with reputable funding companies and may negotiate better buyout terms on behalf of their clients.

• Lien management: Attorneys ensure that all liens are properly released when buyouts occur and that new liens are appropriately documented, avoiding complications when the case settles.

• Protecting client interests: Above all, attorneys ensure that buyout decisions align with the client’s overall interests and don’t jeopardize the case or settlement prospects.

Most pre-settlement funding agreements require attorney acknowledgment, meaning the attorney must be aware of and consent to the funding arrangement. This provides an important safeguard for plaintiffs.

The takeaway

Pre-settlement funding buyouts represent an important option for plaintiffs navigating the financial challenges of lengthy litigation. When structured properly and pursued under appropriate circumstances, buyouts can reduce overall costs, improve terms, consolidate multiple advances, and provide greater financial flexibility.

However, buyouts are not universally beneficial. They require careful analysis of current balances, projected settlement timelines, alternative options, and the true costs involved. Hidden fees, prepayment penalties, and the terms of new agreements can all impact whether a buyout truly serves the your best interests.

Whether facing mounting medical bills, living expenses, or simply the stress of prolonged litigation, plaintiffs deserve options that protect their interests. Understanding pre-settlement funding buyouts empowers them to make choices that best serve their needs during one of the most challenging periods of their lives.

Let Peachtree help

Lawsuits are expensive and time-consuming. Getting your day in court can take months or even years, and in some cases, this is only just the start of a long process. If you suffered an injury or a loss, you may need money to help cover expenses such as rent, utilities, and medical bills. Until you get the money you deserve, you need to find a way to pay these bills on your own.

Before you check the limit on your credit card or start calling your friends and family, contact us about pre-settlement funding. If your case qualifies, you can get a cash advance upfront.

Why should you choose Peachtree?

It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.

Call 1-855-680-4121 and speak with a representative today!

This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.