All You Need to Know About Legal Funding
Legal funding, also known as lawsuit loans, settlement loans, lawsuit funding or pre-settlement funding, is the advancing of money to lawsuit plaintiffs prior to settlement or trial. These financial transactions give money to mostly personal injury litigants in exchange for a portion of the future settlement in a lawsuit or insurance claim.
The merits of legal funding continues to be debated by insurers, plaintiff attorneys, clients and the legal profession as a whole. One thing for certain is that plaintiffs need funds and legal funding is a viable source of funds prior to settlement.
Below we discuss the basics of legal funding; what need it fills in the marketplace; how the deals are structured, what criticism it faces and the current state of the legal funding industry. After reading this, you will have a thorough grasp of legal funding and can decide whether it suits your needs.
Legal Funding Serves an Existing Need
Legal funding companies offer lawsuit loans to litigants who need immediate cash to pay for expenses during a lawsuit or insurance claim. Legal funding is the market’s response to cash flow problems accident victims face because their injuries prevent them from working.
Settlement loans offer a cash flow solution to these individuals.
The ability to weather the financial storm allows plaintiffs the ability to properly fight financially strong insurers who represent the interests of defendants. These large, well funded, companies have the financial wherewithal to hire teams of attorneys to delay the payout of claims. Lawsuits can drag on for years before a resolution is reached. This sometimes causes insolvent plaintiffs to accept ‘low-ball’ settlement offers because they cannot meet their monthly expenses. Legal funding allows plaintiff attorneys the time to pursue the case properly and secure the maximum settlement award.
Legal funding gives immediate cash to plaintiffs and better still – there are no restrictions on the use of the money. Many plaintiffs use the money to pay bills, but other uses are also common. Settlement loans are both immediate and flexible – two characteristics that attract legal funding clients to this service.
Alternatives to Settlement Loans
Legal funding for plaintiffs is normally a last resort. Most plaintiffs turn to family and friends for funds if they are short money. Some sell assets and/or redeem some or all of their retirement funds/pensions to cover the shortfall. Others take a loan on their home or other forms of raising capital quickly to pay expenses.
Plaintiffs may not think of legal funding initially. Perhaps it is because they do not understand the process or even realize it is an option. Some might think it takes weeks to secure lawsuit loans. The fact is however, settlement funding can be a quick, easy source of immediate funds for plaintiffs.
How to Use Legal Funding
Like stated above, most plaintiffs use legal funding to pay for living expenses. However, many plaintiffs and their lawyers use lawsuit loans to help enhance their case. Because there are no restrictions on the use of lawsuit loans, legal funding is available to pay for accident reconstruction evaluations, vocational experts, medical experts, deposition fees and court costs.
Another valuable use of legal funding is to help pay for surgical procedures when medical or other insurance coverage is unavailable. Because medical coverage is unavailable, legal funding is used to pay medical providers directly. The result is that the client gets the needed treatment and the case becomes more valuable because of the extensive medical treatment involved.
In truth, the only restriction on legal funding use is that of the plaintiff’s imagination. Legal funding can pay for expenses but savvy clients can make use of the money in creative ways and increase their case’s value.
Lawsuit Funding Agreements
Plaintiffs and the best lawsuit loan companies enter into legal funding transactions which provide cash now to plaintiffs in exchange for a portion of the future proceeds of a case. The agreement calculates the repayment according to the duration of the claim. That is, the repayment depends on how long the case takes to resolve.
Although commonly referred to as lawsuit loans, legal funding contracts are not actually loans. While a typical loan requires repayment under all circumstances, settlement loans are only repaid upon the successful resolution of a case. Legal funding contracts are actually a transfer of future property rights in lawsuit proceeds.
If the case is unsuccessful, there are no proceeds and the property rights are worthless. That is, the plaintiff is not required to repay the advance. Lawsuit funding companies have no recourse against plaintiffs under this scenario.
Attorney Involvement in Legal Funding Transactions
Lawsuit loans require legal representation, typically on a contingency fee arrangement. Legal funding contracts also require attorneys to cooperate with processing. Once an applicant is entered into the system, requests for documents are forwarded to counsel. Either the attorney or firm staff normally compile and send the documents for processing. Once reviewed, lawsuit funding underwriters contact the firm and discuss the merits of the case.
Once approved, a contract is sent to the lawyer and client. The lawyer must also sign the agreement and acknowledge the advance will be repaid at the time of settlement.
Legal Funding Contract Terms
Legal funding contracts are generally unregulated deals between private parties. As such, terms and conditions can vary greatly. However, lawsuit funding terms and conditions are governed by the free market in that competition dictates pricing.
Lawsuit funding can be costly. The cost is determined by the percentage rate applied to the contract amount.
Compounding and Non-Compounding Rates
Two types of rate structures exist in the marketplace. The first charges a percentage rate on the original contract amount. For example, Legal Funding Company A charges 18% every six month period until the case is resolved and money disbursed. The 18% is applied to the original contract amount ($10,000) so if the case were to disburse within the first six months, the repayment would be $1,800 + $10,000 = $11,800. If the case were to disburse between 6 months from the date of execution and 12 months, the repayment would be an additional $1,800 for a $13,600 total repayment.
The second rate structure involves compounding monthly percentage rates. Under this structure, the same $10,000 would be multiplied by a monthly rate (3%) and added to the balance. After month one, the balance would be $10,300. In the second month the rate is calculated on the balance (not the original contract amount) or $10,300. Thus, the balance after month 2 is $10,300 x 3% = $10,609. The “compounding” rate structure can prove more expensive if the case should last more than two years.
Legal Funding Repayment Periods
Lawsuit funding repayment occurs in six month increments. In other words, if the case is resolved anytime within that period, the payoff is the same. For example, a $10,000 funding contract executes on a certain date. The legal funding contracts allows for repayment in the amount of 18% every six months – simple interest. The case is settled some time within 6 months. The repayment is $11,800 because the case was resolved in the first 6 month “bucket”.
That is, once the contract was signed, the repayment was the full 18% on the contract amount. It makes no difference whether the lawsuit loan in repaid in the 1st month, or the 5th month. The repayment is the same for the entire 6 month period.
There are no prepayment penalties but clients are not generally allowed to make payments on the balance.
Legal Funding Criticism
The legal funding industry continually faces criticism. Opponents, usually insurance companies or their representative groups, label the cost of lawsuit funding “outrageous”. These attacks attempt to classify settlement funding as loans. If they were traditional loans, most lawsuit funding contracts would violate state usury laws. They urge an outright ban on the practice.
Insurance companies are the very entities that ultimately pay damages for the vast majority of personal injury lawsuits and claims. Payment of these claims IS their business. Yet minimizing payouts is to maximize profits. And one sure fire way to minimize settlement amounts is to delay payment.
Financially strong insurers hold financial leverage over claimants and plaintiffs. A delay in payment means plaintiffs who cannot work due to accidental injury, face severe financial hardship because of the accident. They are victims of circumstance. And are often forced to accept low ball settlement offers simply because they need money fast.
Delays are the very reason settlement loans were created – to help litigants wait out the litigation process so their attorneys can work toward a fair resolution. Nevertheless, insurers and their mouthpieces portray legal funding as a blight on the legal landscape, surely resulting in an increase in frivolous lawsuits and other non-nonsensical predictions.
Legal funding however, continues to help litigants weather the financial storm and bridge the gap between an accident and the successful resolution of the claim for damages.
Lawsuit Funding Advocates
Legal funding advocates include settlement loan companies and many plaintiffs’ lawyers who want the best for their clients. Lawsuit funders can point to the explosive growth of the legal funding market in the last 10 years as proof there is a legitimate need in the marketplace being filled.
The best lawsuit loan companies truly desire fairness in pricing and terms for consumer protection. In fact, many lawsuit loan companies adhere to the industry’s best practices as outlined by the Attorney General of the State of New York. Several years ago, a group of lawsuit loan companies approached then Attorney General of New York, Eliot Spitzer, to create guidelines for legal funding disclosures on written contracts. These provisions call for all settlement funding agreements to have a disclosure statement which contains the following:
- A statement of the total amount to be advanced to the consumer;
- Itemization of application, origination, processing, administrative and other fees;
- A statement of the percentage rate of return, on an annualized basis, including compounding frequency if applicable;
- A statement of the total repayment amount, broken out in 6 month intervals and carried forward to 3 years following the contract date, including fees and a minimum payment amount;
- The right of behalf of the consumer to rescind the deal within 5 days AFTER execution.
Settlement loan advocates assert these guidelines, pursued by the industry itself, is evidence of a business which is trying to help litigants in an honest manner. They are an attempt to legitimize the business in a climate of critics and negative propaganda.
Legal Funding Business Currently
The settlement loan industry thrives in this economic environment, yet constantly adapts to the needs of customers. For example, most lawsuit loans are for personal injury plaintiffs involved in auto crashes, slip and falls, premises injuries, medical malpractice and other common personal injury claims.
Over the last few years however, many lawsuit loan companies have been financing the costs associated with complex mass tort litigation such as with transvaginal mesh lawsuits and defective hip and knee implants.
Large plaintiff firms need legal funding to finance operation since these types of cases involve large defendants and they are representing hundreds if not thousands, of clients. The costs associated with such a large undertaking are considerable. Legal funding allows these firms to mitigate some of their financial risk.
Recent Legal Funding Court Decisions
Recent court decisions regarding legal funding do not agree that lawsuit loans are traditional loans. Legal funding percentage and fee costs typically amount to more than state usury laws allow. If usury laws applied to legal funding, lawsuit funding companies could not turn a profit. Thankfully many courts decline to categorize legal funding as loans. If they did, most lawsuit loan companies would cease operations. Of those which remain, many potential customers would be left without funds that otherwise would have been available to them.
A recent decision in Ruth v. Cherokee Funding, a legal funding company advanced money to Ruth at a higher than competitive rate (4.99% per month). Ruth’s attorneys refused to repay at settlement stating the agreement violated certain laws in the state of Georgia. The Georgia Supreme Court found: “The provision of funds under an agreement that imposes only an uncertain and contingent repayment obligation is not a ‘loan’… such a transaction is better characterized as an ‘investment contract.’”
In December, 2018, the New York Appellate Court refused to classify settlement “loans” as traditional loans. In deciding Cash4cases v. Burnetti, the Court held, “Although the interest rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant.”
Some states have outlawed the practice of lawsuit lending in its entirety. Most however repeatedly find that legal funding contracts are not loans in the traditional sense.
Legal Funding Case Types
By far the most common legal funding case type involves an automobile accident. Car accident legal funding is the most common because liability is easily established and medical records can prove substantial damages. The more documentation available, the easier it is to underwrite a lawsuit funding deal.
Most settlement funding companies also offer advances for slip/fall, worker’s comp, dog bite, FELA, Jones Act, medical malpractice, nursing home neglect, product liability and wrongful death cases. Although these case types represent the majority of legal funding, any lawsuit can be considered.
Lawsuit Loans Help Litigants
Settlement loans serve a legitimate need in the legal marketplace. In the realm of personal injury law, lawsuit loans help litigants weather the financial storm while they wait for their case/claim to be resolved. If you have any questions with regard to plaintiff funding, lawyer loans, or other type of legal funding, please contact us at 888-964-2224. We are here to help.
Thank you for your interest in legal funding.