Once considered a novelty or trend, legal funding is now firmly established as a viable financial option for plaintiffs in need of cash while their cases are pending. Its mainstream acceptance is reflected in two key metrics. The first is a dramatic increase that confirmed their firms participate in legal funding programs (from single digits to more than 25 percent in just three years). The second is the sheer number of estimated monthly applications (at least 40,000) received and reviewed by the industry’s top companies.
Even so, myths and misconceptions persist. By far the most disturbing of these is that legal funding companies exploit vulnerable plaintiffs. Some additional misconceptions are that legal funding is only provided as a loan; that legal funding companies will disrupt the legal process related to your case; and that the industry is not regulated.
If you are a plaintiff in a personal injury case and you need some money to help make ends meet until your case is resolved, you need all of the facts about legal funding. Once you have them, you can make an informed decision about whether it is the best option for you.
With that being stated, we will debunk some of the most common myths below.
Myth 1: Legal Funding is the same thing as a traditional loan
Unlike traditional loans, Funding Agreements do not have to be repaid unless you win or settle your case in states. If you lose your case, you are under no obligation to repay the legal funding company.
This is a key benefit because it means that the Funding Agreement doesn’t add to your personal debt. However, a personal loan will. This is because a traditional lender, such as a bank or credit union, requires repayment of principal, with interest, no matter what. In other words, by taking out a personal loan, you will have an additional financial responsibility while your case is pending, and after it is resolved (depending on the terms).
In states where legal funding is regulated and provided as a loan, you may still be liable for repayment, even if you lose your case or your settlement is less than expected and doesn’t cover everything. A reputable litigation funding company will work with you when that happens, including by forgiving the debt.
In any case, to qualify for legal funding, the company you choose considers the strength of your personal injury lawsuit and the likelihood of a settlement, along with other factors. While a litigation funding company may request your credit report to ensure that you do not have any conflicting obligation, they typically do not consider your credit score. In contrast, to qualify for a personal loan, the lender usually considers your credit score, employment history, and other factors. In this context, your credit history will usually carry significant weight; so if you don’t have a good one, you may not be able to secure the loan you need, or end up saddled with a high-interest loan that will take longer to repay.
It’s worth noting that legal funding companies are for-profit operations, and you will pay fees and charges in a Funding Agreement. That said, the total fee in the Funding Agreement you will have to pay is generally capped after a specific period of time. This eliminates the temptation to accept an early settlement for less than the case is really worth and allows your attorney to take the time he or she needs to get you the best possible outcome.
Myth 2: Legal Funding Providers Interfere with Your Personal Injury Lawsuit
One concern you may have if you obtain legal funding, is that the company’s financial stake in your case will prompt it to interfere.
Since your lawyer is legally obligated to act in your best interest, he or she may also share these concerns. Specifically, he or she may be concerned that the company will pressure him or her to reach a quick settlement, thereby compromising your case.
But if you stop and think about it, this really doesn’t make any sense. By providing cash based on your pending settlement and requiring only conditional repayment, the company is assuming considerable risk. So it is counting on the successful settlement or resolution of your case. In fact, the legal funding company is banking on it. So why would it put the outcome at risk by interfering?
In reality, a reputable legal funding company won’t do this at all. Instead, you and your attorney handle all aspects of your case, such as making settlement decisions, determining and executing the proper legal strategy, and related legal matters.
There are two key reasons for this. First, best practices defined by the Alliance for Responsible Consumer Legal Funding (ARC) preclude any interference whatsoever. Secondly, most states prohibit such conduct.
Myth 3: Legal Funding Takes Advantage of Plaintiffs
This is probably the most pervasive myth surrounding the legal funding industry. As we have already noted, it is also the most disconcerting.
Industry critics – including some attorneys who aren’t fully informed about the benefits of legal funding — fuel this misconception by claiming providers exploit individuals when they are most vulnerable. A related criticism is that recipients don’t have a chance to make an informed decision.
That couldn’t be further from the truth. In fact, legal funding is a valuable resource for many injured people – such as single parents — who have to support their families but don’t have significant savings. This is because – as we have discussed – legal funding doesn’t create additional personal debt, and poor credit won’t preclude someone from obtaining cash based on a pending settlement of his or her case.
The truth is that if you were involved in some type of injury accident, you may be facing significant medical expenses, loss of income and costly rehabilitation. On top of all that, you’d still have to find a way to cover all of the regular bills.In these circumstances, legal funding acts as a type of safety net, to relieve your financial burden and give you and your loved ones much-needed peace of mind.
Myth 4: The Legal Funding Industry is Not Regulated
Initially, this was true. But that is no longer the case. Today, the industry is subject to an increasing number of rules and regulations. Along with the creation of relevant practices and policies, they have been implemented to protect each plaintiff’s best interests.
Today ARC encourages practices and regulations that allow plaintiffs and their loved ones to make informed decisions in consultation with their attorneys. This is a collective effort between providers, consumers, and others interested in ensuring fairness and transparency. Accordingly, we also advocate for fairness, transparency and preservation of consumer choice, at the state and federal levels.
Furthermore, the litigation funding industry is specifically regulated and subject to disclosure and other consumer protections in Oklahoma, Nebraska, Indiana, Ohio, Tennessee, Maine, Vermont, and Nevada.
Takeaway for Lawyers
As a lawyer, professional ethics preclude you from lending your clients money to alleviate their financial stress. But there are other ways you can help them cope with this burden while their case is pending. Specifically, you can ensure that you are fully informed about the basics of legal funding. This way, you can recommend it as an option if need be. It will also allow you to be prepared when clients will seek out legal funding on their own, and understand how legal funding can benefit you as a lawyer.
Oasis provides pre-settlement funding, also known as consumer litigation funding, to its customers through different products depending on their state of residence or cause of action. Many consumers will be provided pre-settlement funding in the form of a purchase agreement, which assigns a portion of the pending proceeds from their legal claim. Other consumers, such as those in SC and CO will be offered a funding in the form of a pre-settlement loan, sometimes referred to as a lawsuit loan. These transactions have important differences, therefore, consumers should carefully review and be aware of the type of transaction that is offered to them by any funding company.