All too often, plaintiffs lose out on the justice they deserve simply because they can’t afford to fight for it. Pre-settlement funding is transforming the way plaintiffs and their lawyers approach litigation by allowing victims to access their award when they need it most – now.
While the legal funding industry remained relatively unknown until recent years, it’s gaining more visibility as institutional investors move into the scene. That makes legal funding a more common topic of discussion in law offices, making it important for attorneys to understand what it offers.
What Pre-Settlement Funding Is (and Isn’t)
For anyone reading about legal funding, it is easy to get confused by the terminology used in the industry. Pre-settlement funding is commonly and mistakenly referred to as “loan.” This is not a loan in the regular sense, since if you lose the case, you don’t have to pay back the amount. However, to keep things simple, we will use the word “loan” on this page. Therefore, legal funding is known by a variety of names, including the following:
- Lawsuit loans
- Legal funding
- Legal loans
- Settlement loans
- Settlement funding
Despite its name, a legal loan poses no risk to the plaintiff. Their assets are never at risk, and they don’t need to repay the loan if they lose the case. Furthermore, they won’t ever owe more on the loan than their settlement is worth.
How can this be? Settlement loans are offered as nonrecourse loans, meaning the plaintiff is under no obligation to repay them with their own money. The only collateral that can be used in a settlement loan is the hypothetical value of the settlement itself. In fact, the IRS classifies lawsuit loans as a type of investment, placing all of the risk with the financial institution.
The lack of risk associated with lawsuit loans makes them an attractive alternative to other forms of financing a plaintiff might turn to, such as credit cards or personal loans. Lawsuit loans from legitimate financial institutions also feature low, simple interest rates. The total amount of interest may be capped once a certain amount of interest has been charged, further protecting borrowers.
Legal Funding Is a Growing Industry
Since its beginning with the landmark 1980 ruling in the Texas Supreme court, legal funding has gained traction as a legitimate financing alternative for plaintiffs involved in lengthy settlement negotiations. Given legal funding’s status as an investment, the lawsuit loan industry has also attracted a growing pool of institutional money in recent years.
Legal funding offers an attractive source of uncorrelated returns for investors seeking to maximize their returns. Hedge funds, in particular, have moved into settlement funding as their interest in nontraditional assets has grown. Due to this influx of new capital, legal funding has transformed from a scattered collection of small, independent financial institutions into a national industry.
In addition to a greater depth of resources, these new institutional funding sources provide an added impetus for transparency and fairness within this industry. This comes at a critical time, as the pre-settlement funding industry continues to grow rapidly as more lawyers and plaintiffs learn about this financing option.
How Does Legal Funding Work?
The actual process by which legal funding works is quite simple. A plaintiff who has filed a lawsuit and retained a lawyer working on contingency can apply for a lawsuit loan with a legal funding company. Plaintiffs submit documentation relating to their case along with their contact information. Typically, this process takes just a few minutes.
Once the application has been submitted, the legal funding company will review the plaintiff’s case. Often, they can approve an application within 24 hours. As lawsuit loans are nonrecourse, they don’t require a lengthy approval process. Legal funding companies will evaluate the merits of a plaintiff’s case, and they will make a lending decision based solely on that information.
How Legal Funding Can Benefit Lawyers and Plaintiffs
Legal funding offers two key benefits to lawyers and plaintiffs. For plaintiffs, they won’t need to worry about the defense’s financial pressure tactics. Plaintiffs often miss out on their settlement simply because they can’t afford to fight for it. Many others never even file a case because they assume the costs of a lawsuit will be too much for their household to bear.
For plaintiffs, lawsuit loans can cover a wide array of expenses they might face after an accident, including the following:
- Living expenses (groceries, utilities)
- The cost of a new vehicle
- Childcare costs
- Rent or mortgage payments
- Medical expenses
- Paying off credit card debt
Legal funding comes with no strings attached, and plaintiffs can spend it however they want. Lawsuit loan recipients also don’t have to worry about repaying their funding, giving them much more leeway in how they spend their money. With their expenses covered, plaintiffs may be less inclined to settle for a lower amount than what they could win by seeing their case through.
With less pressure to settle, plaintiffs can take more time to resolve their case, which also gives lawyers more time to build theirs. Attorneys have more time to collect evidence and negotiate with the defense to get a better settlement offer for their clients. Should the case escalate to a trial, plaintiffs can enter with a much stronger hand than they would with less time.
How Much Legal Funding Can a Plaintiff Get?
Plaintiffs can theoretically receive legal funding to cover their entire prospective settlement. However, in most cases, lawsuit loans themselves are capped at around 20% of the expected value of a settlement or award. This protects plaintiffs from losing too much of their settlement to interest. It also protects financial institutions from exposure to excessive downside risk.
Plaintiffs aren’t limited to a set number of lawsuit loans they can take out. Legal funding companies will typically offer anywhere from 5 to 10% of a settlement’s value as an initial lawsuit loan. Should a plaintiff require more funding, they can apply for a second or third lawsuit loan. Given that legal funding accrues interest, it’s better for plaintiffs to borrow only what they need.
When a Plaintiff Needs Legal Funding
Legal funding offers numerous benefits, but it isn’t for everyone. Lawsuit loans do come with interest, and while a reputable financial institution will keep their rates relatively low, these can still add up to large interest charges once a case is resolved. In order to determine if legal funding is an appropriate choice for a plaintiff, it’s crucial to evaluate their financial options.
A lawsuit loan can be appropriate for a client if they have suffered extensive injuries as a result of their accident and face high medical bills. Legal funding could also be appropriate if a plaintiff suffered a loss of income from their damages. If a plaintiff is facing imminent expenses that could prevent them from seeking a higher settlement, a lawsuit loan may also be appropriate.
Prior to seeking a lawsuit loan, a plaintiff should explore other options for covering their expenses. If a client needs to take on debt to pay for their expenses, then a lawsuit loan is usually a safer choice than other recourse alternatives.
About the Author
Leland D. Bengtson dedicated most of his career to law reporting. He aims to draw in the public and make people more interested in the field.