What Is Attorney Funding?
Attorney funding is asubset oflegal funding that is tailored specifically to plaintiffs’ attorneys. Types ofattorney financing include pre-settlement funding, post-settlement fee advances,law firm lines of credit, case cost financing, and voucher funding.
But before we get too farahead,let’s quickly go over the basics of legal funding.
A Legal Funding Primer
Legal funding, also referred to as lawsuit funding, litigation finance,or legal lending, is a type of financing that was specially developed by legalexperts to help both attorneys and their plaintiff clients thrive economicallywhile waiting on decisions to be rendered or paid out in long-lasting legalbattles.
Legal funding can becustomizedto benefit contingency fee attorneys, whose incomes depend on whether and whentheir cases settle. Different funding methods can be tailored to fit anattorney’s case, budget, and time frame demands. With an advance from a legalfunding company, attorneys will be better prepared to build a winning case orbuild a growing firm.
Why Would An Attorney Use Legal Funding?
Contingency fee attorneyssacrifice time, expertise, and money to put together solid cases without anyguarantee of payment. In cases that settle in favor of the defendant,plaintiffs’ attorneys walk away with absolutely nothing.
Litigation is not just anuncertain process, but it is notoriously lengthy. The typical personal injurycase, for example, has about a two year life span, from the filing of thecomplaint to the settlement distribution.
While that two year periodmayseem like a long time to wait for a paycheck, MDLs, torts, and malpractice casescan take even longer. For larger cases or cases involving minors, governments,or international entities, settlement delays of ten or fifteen years are notuncommon. Waiting fifteen years for an attorney’s fee can be financiallycrippling.
Don’t LetSettlement Delays Ruin Your Law Practice
As with any business,running alaw firm requires a steady flow of capital. Many attorneys struggle to maintaina successful legal practice when their fees are astronomically delayed. Thosefees are the lifeblood of any thriving practice: without them, it becomesenormously difficult to build cases, to find new clients, or even to maintaindaily expenses.
The different types ofattorneyfunding are designed to fit the needs of solo practitioners and larger firmsalike, allowing contingency fee attorneys to thrive while waiting on their feesto be paid out. With a funding advance, attorneys can hire expert witnesses,cover discovery costs, pay for advertising and administrative costs, andmaintain an office space without worrying about running out of capital.
Why Not Just Go To The Bank?
Though many smallbusinesses haveopted for the traditional financing methods of taking out a bank loan or line ofcredit (LOC), attorneys might find that these are not the easiest or mostpractical choices.
Banks perform personalcreditchecks as part of the loan qualification process. Because attorneys are runningtheir businesses as individuals, their personal credit is affected by businessdecisions and may not meet bank standards, making approval less likely.
Banks and othertraditionalfinance institutions typically ask for some form of collateral, such as bonds,stocks, or real estate, in exchange for a loan or line of credit. This isanother reason that attorneys might have trouble meeting the qualifyingstandards; many attorneys who would be seeking a financing option may not havemuch collateral tied to their businesses.
While it is not impossibleto beapproved for a loan by a bank, and though bank loans often have a lower interestrate than alternative financing options, the difficult application process andmonthly repayment requirement may be discouraging to many attorneys who are inneed of immediate capital.
How Does Legal Funding Work?
Legal financing isdifferent froma bank loan or a line of credit in two ways: First, from application todistribution, it was specifically designed for attorneys and their clients.Second, except for the Attorney Line of Credit (described in more detail below),legal funding is an advance, not a loan. This means that all the money thatattorneys receive from legal funding advances come from their own future fees.Advances to plaintiffs would come from their settlement awards.
Legal funding agreementsare madebetween plaintiffs’ attorneys and third party lenders (legal funding companies).For all types of legal funding aside from the Attorney Line of Credit,plaintiffs and attorneys must be engaged in ongoing litigation or have recentlysettled a case before submitting a legal funding application.
An Attorney-Friendly Application Process
Legal funding applicationsweredesigned with attorneys in mind, so they are structured differently thanapplications for bank loans or lines of credit.
Unlike banks, which askfornon-liquid collateral in exchange for future capital, lawsuit funding companiesaccept future receivables as collateral. For attorneys and law firms, caseinventories count as future receivables. Legal funding firms understand thepotential value of a pending lawsuit or a settlement, so they can accept caseinventories as proof that attorneys and law firms will be able to repayadvances.
Legal funding firms do notrequire personal credit checks to confirm an application for two reasons. Asmentioned above, funding advances are taken out as business expenses, not aspersonal expenses, so personal credit checks are unnecessary. Furthermore, withmost types of legal funding, attorneys are not directly responsible for repayingadvances. Instead, payments are taken directly out of attorney escrow accounts,administrative accounts, or obligor accounts.
After an applicant hasbeenapproved, a portion of the attorney’s pending settlement will be purchased fromthe obligor. The funding company purchases only a portion of the advance as away to minimize risk and to ensure that the attorney will have access to feeslater on. A funding company will typically purchase between only 10% and 50% ofan attorney’s fee from an obligor.
Attorneys can receivetheirfunding within 48 hours after their agreement has been approved. There are nolimits to how attorneys can spend their advances to enhance theirbusiness.
What Types Of Lawsuit Funding Are Available To My Plaintiff Clients?
The two main types of plaintiff lawsuit funding are pre-settlement and post-settlement funding. Astheir names suggest, pre-settlement funding is available only before a case hasbeen settled, while post-settlement funding becomes an option after a settlementhas been reached.
Pre-Settlement Lawsuit Funding For Plaintiffs
Because even the mostcommonforms of personal injury cases can take up to two years to reach completion,plaintiffs need a source of funding during this time to get through day-to-daylife and to cover any expenses associated with their lawsuits.
Of the two types of legalfundingavailable to plaintiffs, pre-settlement funding is more expensive because of thegreater risk involved. When plaintiffs apply for pre-settlement funding, thereis no guarantee that a settlement will be reached, so funding companies usuallycharge a higher premium.
Post-Settlement Award Advances For Plaintiffs
Settlements are typicallynotdistributed immediately after a case has settled, so plaintiffs may still findthemselves waiting to see their legal compensation for months or years after acase has come to a close. For plaintiffs who need access to their settlementaward but do not want to pay for the risk associated with pre-settlementfunding, a post-settlement award advance may be the best choice.
Though there is always asmallchance that the plaintiff’s obligor would be unable to pay the agreed uponsettlement, legal funding companies offer post-settlement funding as anon-recourse agreement, meaning that even in the case of non-payment, plaintiffswould be able to keep any money that was advanced to them.
What Types ofAttorney Funding Are Available To Me And My Law Firm?
Of the four main types oflegalfunding available to attorneys, two are very similar to those available toplaintiffs: pre-settlement funding and post-settlement funding.
Voucher Funding is a typeofadvance that is available only to attorneys who have been hired by stategovernments.
An Attorney Line of Creditis atype of funding that does not follow the guidelines set out above; structurally,it is similar to a bank line of credit, though it is customized to benefitattorneys.
Pre-Settlement Attorney Funding
Trying a case withoutaccess tothe money granted by legal fees may prove difficult for many lawyers, especiallywhen competing against well-funded defendants like insurance companies andmulti-million dollar organizations.
Pre-settlement legalfunding maybe the right option for an attorney who needs more capital to build a winningcase. With a funding advance, attorneys can afford to put more resources intothe discovery, travel, interviews, and research needed to reach the desiredsettlement.
Like the pre-settlementfundingoption available to plaintiffs, this financing solution is available only beforea case has been settled. The premium for pre-settlement funding is higher thanthat for other types of legal funding because there is a greater risk that acase will not be settled, and thus a greater risk that the advance will not berepaid.
Post-Settlement Funding For Attorneys
After a case has beendecided,attorneys may still face a long wait time before receiving their hard-earnedlegal fees. Without access to these fees, it becomes frustrating and challengingto pursue new cases, secure new clients, and maintain a functioningpractice.
Contingency fee attorneyscanselect the post-settlement funding option, which is available only after a casehas been decided, to receive an advanced portion of their legal fees. With thisadvance, attorneys will have the necessary funds to expand theirpractices.
As with the plaintiff post-settlement funding option, attorney post-settlement litigation funding isnon-recourse. This means that if for some reason the obligor were unable to paythe agreed upon settlement amount, preventing the payment of attorney fees, thatattorney would still keep any portion of the fee that was advanced under a legalfunding agreement.
Voucher Funding For Attorneys
Many attorneys areappointed bythe government as public defenders, also known as indigent defense attorneys.Because these attorneys are on the state payroll, they are supposed to receivetheir legal fees directly from the state. States offer vouchers to theseattorneys as a promissory note.
Typically, state appointedattorneys have to wait only one or two weeks to receive their pay.Unfortunately, due to economic downturns that have affected numerous states overthe past few years, public defenders have been forced to wait months for theirpay.
Voucher funding works much like post-settlement funding does in that itcan occur only after a voucher has been issued. Once a voucher fundingapplication has been approved, the legal funding firm will purchase a portion ofthe attorney’s expected fee and the attorney will receive that portion as anadvance. The legal funding firm will be repaid directly from the obligor, whichin this case is the state that hired the attorney.
Attorney Lines Of Credit
Unlike the other forms oflegalfunding mentioned above, an attorney line of credit (also commonly referred to as law firmfunding or law firm line of credit) is not advances. Instead, it functions inthe same way as bank lines of credit do. The main difference between bank LOCsand attorney LOCs is that, as with pre- and post-settlement funding advances,legal funding companies accept case inventories as collateral.
The amount of capitalextended inline of credit depends on the size of a law firm’s case inventory. An LOC can beincreased as a case inventory grows.
Lines of credit are greatoptionsfor law firms that are seeking to advance on any level. Whether they are lookingto expand their marketing efforts, bring on new staff, or increase theircaseloads, a line of credit offers a continuous source of capital that can bewithdrawn on a monthly basis. Repayment plans are flexible and can be arrangedto fit the specific needs of an individual law firm.