Resource Guide for Plaintiffs Considering Consumer Legal Funding
Lawsuit funding is a cash flow option available to plaintiffs involved in litigation where they’re paying their attorney on a contingency fee basis. However, very few people have a good grasp of plaintiff funding fundamentals.
Hopefully you’re never involved in a lawsuit and never need to apply for a lawsuit advance. Nonetheless, it doesn’t hurt to be educated.
After reading this guide, you will understand:
- The definition of legal funding.
- How lawsuit funding compares to other financial options.
- The difference between a lawsuit advance and a traditional loan.
- The two main types of plaintiff funding and how they differ.
- The pros and cons of working with a legal finance company.
- Is lawsuit funding the right choice for your specific circumstances?
Let’s Start by Broadly Defining Legal Funding
Simply put, legal funding is an advance specifically for plaintiffs and attorneys who are paid on a contingency fee basis, where both parties can receive financing against their anticipated award or legal fee.
A plaintiff’s advance is based on their award from a successful settlement or judgment, while the plaintiffs’ attorney’s advance is based on their contingency fee, which is usually between 30% and 40% of the award the plaintiff they are representing wins.
Different Terminology for Legal Funding
There are numerous synonyms that are used interchangeably for legal funding. Since we’re dealing specifically with financing plaintiffs, two of the most common terms are lawsuit funding and pre-settlement funding. Other common terms are lawsuit loans, settlement loans, and lawsuit lending.
This is how Wikipedia defines legal financing:
“. . . the mechanism or process through which litigants (and even law firms) can finance their litigation or other legal costs through a third party funding company. These third party funding companies provide cash advances to litigants in exchange for a percentage share of the judgment or settlement. However, if the case proceeds to trial and the litigant loses, the third party funding company receives nothing and loses the money they have invested in the case. In other words, if the litigant loses, he does not have to repay the money. Accordingly, to qualify for funding with a legal financing company, a litigant’s case must have sufficient merits.”
In the above definition, “third party funding company” simply refers to the legal finance firm that advances funds to the plaintiff.
The second part of the definition states that if the plaintiff loses his case, he is NOT responsible for repaying the money advanced to him by the funding company. Such an advance is referred to as a non-recourse transaction. The non-recourse concept is important to understand because it’s the primary factor that differentiates pre-settlement funding for plaintiffs from a traditional loan.
Lawsuit Funding is an Advance, NOT A LOAN!
This is an important concept: lawsuit funding is an ADVANCE, NOT A LOAN. Unlike a loan, there are no monthly payments, points, or upfront fees.
There may be fees associated with the advance, such as an underwriting fee, but these are not due upfront and are rolled into the advance, only to be repaid if and when the lawsuit concludes successfully.
And as we just discussed, lawsuit advances are non-recourse. So if the plaintiff loses his case or his proceeds are less than what is owed under the terms of the funding agreement, he is NOT responsible to pay the funding company anything.
Speaking of Loans, Why Wouldn’t a Plaintiff Just Go to the Bank?
Great question! Even though bank loans and lines of credit are much more common (and typically less expensive) than lawsuit funding, they’re actually more difficult to access for most plaintiffs.
In order to approve a loan or a line of credit, banks usually ask for hard collateral, typically in the form of non-liquid assets, such as stocks, bonds, and real estate. While some plaintiffs may easily come up with the right assets to apply for a loan, many struggle to put together the collateral necessary to qualify.
Banks also perform personal credit checks on all loan and line of credit applicants, because all loan repayments will come directly from an applicant’s personal accounts. But not all plaintiffs have sufficient credit scores, and any costs associated with litigation or insurance or surgeries might further complicate credit.
Traditional Financial Options a Plaintiff Should Consider Before Taking a Lawsuit Advance
Ideally, if a plaintiff is harmed in a motor vehicle accident and needs money to sustain himself while awaiting a fair settlement, he would obtain money from a traditional form of financing, such as, but not limited to:
- Personal savings
- Borrowing money from a friend or family member
- Bank line of credit
- Loan against a 401K
- Credit card
If you can obtain money through any of the above sources, you should do so before using plaintiff funding, as the cost of obtaining money through these outlets is for the most part cheaper than what lawsuit funding will cost you.
So If Lawsuit Funding Is Expensive, Why Would I Even Consider Using It?
Another great question. Unfortunately, most of us simply don’t have enough saved up to cover the costs associated with lengthy litigation. The inability to work plus extensive medical bills can quickly deplete even a healthy cash reserve.
And as previously mentioned, it isn’t always possible to qualify for a line of credit or credit card, especially if your credit score is less than perfect. Or perhaps you do qualify, but your limit isn’t sufficient to cover your expenses that continue to accrue as your lawsuit moves at a snail’s pace through the court system.
Who Should Use Pre-Settlement Funding?
Plaintiff funding is an option for those whose cases are expected to last more than just a few months, or whose settlements may be subject to serious systematic delays.
If the plaintiff anticipates a quick and fair settlement, they should wait to get paid and not take out a settlement advance if possible.
Lawsuit Funding Should Be Used as a Last Resort
If you’ve exhausted traditional financial options and you need cash to keep up with your expenses, then it may be time to consider applying for a lawsuit settlement advance.
Because the funding company is taking on risk that they lose their principal if the lawsuit doesn’t settle, rates for pre-settlement funding are more expensive than traditional financing options.
To help determine whether or not a lawsuit advance makes sense for you (or if you’re an attorney, your client), please check contact us.
The Settlement Waiting Game
Plaintiffs often opt for litigation as a solution after suffering an injustice: breaking a bone due to negligence, losing a loved one in an accident, home damage during a disaster, job loss due to discrimination, medical complications after a surgery, etc.
But even though litigation can provide plaintiffs with eventual financial compensation, the long litigation process is still an extensive stretch of time for plaintiffs to struggle with their physical and emotional injuries. And usually, plaintiffs wind up waiting even longer to see the results of their litigation than initially anticipated.
The Average Lawsuit Lasts About 2 Years
A typical personal injury case takes about two years to reach completion, from filing to settlement. Medical malpractice cases or workplace discrimination cases may take even longer, with class action suits and multi-district litigation (MDL) generally taking the longest.
Furthermore, if a minor is involved, Medicare or Medicaid liens must be resolved, or if the litigation crosses state lines or if multiple parties are involved, this timeline can continue to stretch on and on . . . .
Don’t Let Litigation Put Your Life On Pause
Pre-settlement funding gives plaintiffs a chance to right some of the wrongs that they’ve suffered while litigation is still ongoing.
For example, a plaintiff can make up for lost wages, cover medical bills or pay for complex surgeries, or help cover other expenses that inevitably pile up. It can help reduce the stress associated with expensive litigation, allowing plaintiffs to focus on other important issues in their lives.
The money that plaintiffs can access through pre-settlement funding can make the difference between getting by and thriving after suffering a personal injury or losing a job.
Don’t Settle for a Low Ball Offer
Furthermore, a settlement advance allows plaintiffs to hold out longer for a fair settlement as opposed to taking a low ball offer from the defense.
Insurance companies and large defense firms are well aware that many plaintiffs involved in serious injury cases are desperate for money. They purposely employ delay tactics to force the plaintiff into taking a low ball settlement offer to maximize their profits.
A lawsuit settlement advance tips the scales of justice in the plaintiff’s direction by giving them the financial resources necessary to better endure lengthy litigation.
How Does Plaintiff Funding Work?
We’ve discussed this already, but it’s important enough to repeat. Lawsuit funding is a monetary advance, not a loan. This means that all the money a plaintiff receives from an advance comes from their own future receivables rather than from a bank’s vault. Future receivables would be a plaintiff’s proceeds from a settlement or judgment.
Lawsuit advance agreements take place between plaintiffs and third party funders, also called legal finance companies. After a plaintiff has secured an attorney and began at least the initial stages of litigation, he can submit an application to the funding company.
A Plaintiff-Friendly Application Process
Applications for settlement funding work somewhat differently than applications for bank loans or lines of credit. Plaintiff advance companies don’t require non-liquid collateral like banks do; instead, they accept anticipated future settlements as sufficient collateral.
Lawsuit funding companies are repaid directly from the future settlement or judgment proceeds, and they are only repaid if there is a favorable outcome, in the form of a settlement or judgment. As previously stated, such a transaction, where repayment is contingent on favorable conditions, is referred to as non-recourse.
The Underwriting Process
Funding companies employ a team of professionals who are intricately familiar with the legal process, so they can offer a variety of financing options that may be customized to fit a plaintiff’s case type, budget, and timeline.
These professionals are referred to as underwriters. They are usually familiar with the types of cases where lawsuit funding is most popular, such as personal injury, motor vehicle accidents, medical malpractice, and product liability suits.
When it comes to lawsuit advances, the overwhelmingly most important aspect to consider is the strength of a plaintiff’s lawsuit. Therefore, they almost exclusively use a plaintiff’s case information to determine whether an applicant is eligible for funding and how much money can be advanced. Therefore credit checks are not necessary.
Underwriters Determine the Following:
- How strong a case is and how likely it will yield a favorable outcome.
- The approximate value of the case based on numerous variables, including the outcomes of similar past lawsuits.
- The projected time frame for the litigation to resolve.
- How much the funding company can safely advance so that they make a profit and the plaintiff still has settlement proceeds upon completion of the lawsuit.
- The discount rate (this is different from interest rate, as we are dealing with an advance, not a loan) that should be applied to the advance based on the overall risk assessment of the case.
How Much of an Advance Can I Get on My Lawsuit?
The funder never purchases the entire settlement amount as both a way to minimize risk and to ensure that the plaintiff will have access to some settlement funds upon completion of the lawsuit.
As previously mentioned, a funding company will generally advance no more than 10% of the projected value of a settlement (this rule of thumb applies to pre-settlement advances). This threshold is higher for post-settlement funding, as there is significantly less risk. So if you have already received an award letter that specifies your settlement amount, but are experiencing a delay in payout of your award, a funding company may advance up to 50% or more of your award in the form of a post-settlement advance.
How Long Does it Take to Receive a Cash Advance?
After a funding agreement has been approved, plaintiffs can receive their funding as soon as the next business day, even the same day depending on how quickly the documentation requested by the underwriters is received. No limits are placed on how this money can be spent.
Once a settlement is paid out, the funding company is repaid directly from the settlement account created by the obligor. Because the funding agreement did not allow more than 10% of the settlement amount to be advanced, plaintiffs do not have to worry about their own personal accounts being used for withdrawal.
What Types of Funding are Available for Plaintiffs?
There are two main types of lawsuit advances available to plaintiffs:
- Pre-Settlement Funding
- Post-Settlement Funding
Like their names suggest, pre-settlement funding is available to plaintiffs who are engaged in litigation where a settlement has not yet been reached.
Post-settlement funding is available for plaintiffs whose litigation has concluded but there is a delay in payout of their award (due to factors such as administrative delays and unresolved medicare/medicaid liens).
Pre-settlement funding is by far the most common type of plaintiff financing and probably the most popular of the many specific kinds of legal funding in general. In fact, most people, even those with some knowledge the legal finance industry, automatically associate legal funding with pre-settlement funding. This can largely be attributed to the plethora of television ads promoting fast cash for injured plaintiffs waiting for their lawsuit to conclude.
Pre-Settlement Lawsuit Funding for Plaintiffs
As mentioned above, even the most common forms of personal injury lawsuits can take up to two years to reach completion. During this time, plaintiffs still need the money to get through day to day life, and to cover any expenses associated with their lawsuits.
Pre-settlement funding is the more expensive option of the two types of legal funding available to plaintiffs. When plaintiffs go to apply for funding, they are not yet sure whether a settlement will be reached, or, when it will be reached, what the eventual settlement amount will be. Because of this level of uncertainty — and the higher chance that a case may settle favorable for the defendant rather than for the plaintiff — pre-settlement funding is more risky to funding companies, and is thus more expensive.
Post-Settlement Advances for Plaintiffs
Even after a long bout of litigation comes to an end, settlements can take a long time to be distributed. Settlements can be subject to appeals, meaning that even after a decision is made, another round of legal proceedings is necessary to decide whether that settlement amount is appropriate. Some larger lawsuits require heavy departmental review after a settlement amount is decided, or procedural legal overviews to determine how the settlement needs to be distributed.
After waiting for months without receiving their award, some plaintiffs decide that they would benefit from a post-settlement lawsuit advance to help them bridge the financial gap between a settlement decision and a settlement/judgment payout.
Though post-settlement funding is only available at the end of litigation — which may in itself take years to reach completion — it is a less expensive option than pre-settlement funding, which is subject to greater risk.
A Real World Example of Plaintiff Funding: Hip Replacement Litigation
One current example where plaintiffs are being offered post-settlement advances involves hip replacement litigation. Several manufacturers, including Johnson & Johnson, Biomet, and Wright Medical, were accused of producing defective devices, which caused injury to patients who had them implanted.
As a result, several MDL’s (multi-district litigation) have been established to compensate those injured. Due to the complexities of MDL’s, there is often a delay between when a plaintiff receives their award letter and when they are actually paid their award funds. A post-settlement advance can help bridge this gap.
Risks Associated with Post-Settlement Funding
The greatest risk associated with post-settlement funding is that for unforeseen reasons, the obligor would be unable to pay the agreed upon settlement. However, plaintiffs should know that most lawsuit funding agreements are non-recourse, so if there ever was a situation where an obligor couldn’t pay, the plaintiff would get to keep their funding advance without having to worry about repayment.