Typing the term “lawsuit funding” into an Internet search engine yields a wealth of information. The trouble is, a lot of it is contradictory and confusing. Some – associated with unscrupulous providers – may even be misleading. This guide is designed to demystify lawsuit funding so you can decide if it is right for you.
Lawsuit funding is cash provided ahead of a settlement or award
The first and most important point you should know is that lawsuit funding may or may not be provided to you as a loan. In most cases you may be offered lawsuit funding in exchange for portion of your lawsuit proceeds – in other words the funding company is buying a portion of your settlement or award through a “purchase agreement” or similar document. In some cases, though, you may be offered lawsuit funding as a loan, with a disclosed interest rate. In either case, you are given cash ahead of a settlement or award stemming from the successful resolution of a personal injury lawsuit.
Typically, lawsuit funders don’t require you make monthly payments. The amount “owed,” which may include fees, is simply paid from the proceeds of your settlement or award.
Who needs lawsuit funding?
Lawsuit funding is a financial mechanism that provides relief for some plaintiffs in personal injury lawsuits. A plaintiff may qualify for this assistance if an attorney is representing them and their case is pending. Plaintiffs who seek lawsuit funding are experiencing some degree of financial hardship due to their inability to work.
Applicants who secure lawsuit funding usually get the cash they need fairly quickly. With much-needed breathing room, plaintiffs feel less pressured into accepting a “low ball” settlement offer from the defendant’s insurance company.
How to apply for lawsuit funding
Once he or she has done his or her due diligence, a plaintiff can apply for lawsuit funding over the phone or on the lawsuit funding company’s website. Because the plaintiff is not applying for a conventional loan, line of credit or similar financing, credit score is not a factor. Instead, the plaintiff must provide certain information about themselves, the case, and their attorney.
Larger funding companies then forward this information to their underwriting departments, where the following is assessed:
- The strength of the case
- The likelihood it will be resolved in the plaintiff’s favor
- How long it will take to resolve the case
- How much the case is worth
- The amount of the funding
The amount of pre-settlement funding provided is percentage of case value
Another source of confusion is how the amount of the funding is calculated. In reality it all boils down to simple math. The amount provided is typically a percentage of the case value.
Using round numbers, let’s suppose the lawsuit funding company’s underwriters estimate your case is worth $250,000. Now let’s suppose the company makes a 10% funding. You would get $25,000. Or if your estimated case value is $100,000 and the company makes a 5% funding, you would get $5,000.
Remember, a legal funding company is taking a calculated risk by providing funds. It provides pre-settlement funding based on a percentage of estimated case value to ameliorate this risk. Generally speaking, 10% of the approximate case value is the most any plaintiff may receive.
As we have already noticed, a plaintiff cannot get legal funding unless he or she has legal representation.
This is partially because legal funding companies need certain information in order to assess a plaintiff’s eligibility. The legal funding company usually requests this information after it receives an application. The personal injury attorney or someone on his or her staff obtains and provides the relevant information.
The underwriters evaluate the information and follow up with the attorney prior to making a determination about the plaintiff’s eligibility. If the application is approved, the legal funding company will send a contract to the attorney and his or her client. In addition to inking the agreement, the lawyer must confirm repayment of the funding will be deducted from the settlement.
Plaintiffs in need of immediate relief benefit from lawsuit funding
A key benefit of lawsuit funding is that qualified applicants get the relief they need fairly quickly. If the case assessment proceeds without any complications, the plaintiff may get this or her cash in 24 to 48 hours from approval. It sometimes takes longer if the underwriters need more information or have trouble verifying information provided.
Lawsuit funding can help plaintiffs in most personal injury cases
As long as you have a personal injury attorney, you may be able to qualify for lawsuit funding if you are a plaintiff in a pending lawsuit following a:
- Car accident
- Slip and fall accident
- Premises liability accident
- Medical malpractice injury
- Dog bites
- Workers’ compensation
- Nursing home neglect
- Product liability
- Wrongful death
In a more recent development plaintiffs in some class action lawsuits have also taken advantage of lawsuit funding.
Uses for lawsuit funding
Another benefit of lawsuit funding is that there are almost no restrictions on its use – the only restriction being that you can use the funding to fund your lawsuit. That being stated, most plaintiffs who get cash through lawsuit funding use it to cover day-to-day expenses. These expenses typically include rent, mortgage payments, groceries, bills and so forth.
Plaintiffs without any other means may also use lawsuit funds to cover the costs of ongoing treatment for their injuries, such as rehabilitation, additional surgery, and medication.
Assessment of applicable fees
The amount a lawsuit funding company recoups from a settlement or award depends on several factors. One is the amount funded. This is simply the amount originally provided to the plaintiff. The second factor is the assessment of administrative and any other applicable fees. The third and most important factor is how long it takes to resolve the case.
Review the legal funding agreement or contract prior to signing it
All of the terms governing the provision and receipt of lawsuit funding are set out in a document called the lawsuit funding contract, or lawsuit funding agreement. These terms typically pertain to the amount offered and the calculation and assessment of any applicable fees. This document usually specifies what will happen if your award or settlement amount is not enough to cover the provided amount after other deductions are taken. Therefore, it is important that plaintiffs have their attorneys review the contract prior to signing it or accepting/using the cash.
Advertisement of lawsuit funding as nonrecourse financing
Lawsuit funding is frequently promoted as nonrecourse financing. Technically, this means plaintiffs do not have to “repay” the legal funding company if they do not receive favorable settlements or awards. This is why pre-settlement funding companies carefully estimate the value of each case, and only provide cash to plaintiffs with the best chances of winning.
With that in mind, there are some circumstances in which a plaintiff prevails, but the settlement amount is not sufficient to cover the amount owed to the lawsuit funding company. This is because other deductions are often made before the legal funding company gets its share. An attorney working on contingency will deduct his or her portion first. If the plaintiff secured a medical lien or liens, medical providers also deduct their payment for services rendered from the settlement.
Legal funding companies usually include stipulations in the contract or agreement regarding the plaintiff’s obligations if this happens.
Conventional options to consider prior to lawsuit funding
Experts advise plaintiffs to consider lawsuit funding only if all other options are exhausted. Preferable sources of financial relief typically include but are not limited to:
- Dipping into personal savings
- Asking friends or family for a loan
- Securing a line of credit from a bank
- Dipping into a retirement fund
- Using a credit card
Synonyms for lawsuit funding
The use of different terms for lawsuit funding is often confusing to consumers. Plaintiffs researching lawsuit funding can expect to come across the following terms, which are used to describe the product:
- Pre-settlement funding
- Lawsuit loans
- Lawsuit lending
- Legal settlement funding
- Pre-settlement legal funding
A business that provides lawsuit funding may also use different names, such as: legal funding company, pre-settlement funding company, lawsuit funding company or pre-settlement lawsuit funding company. These types of businesses are generally classified as legal funding services.
The difference between pre-settlement and post-settlement funding
Pre-settlement funding is the type of legal financing we have been discussing in depth. In this arrangement, a plaintiff in a pending personal injury lawsuit obtains cash in advance of settlement or award from a lawsuit funding company. The company provides the funds against a future settlement or award in the personal injury case. The amount funded and any applicable fees are deducted from the final settlement or award.
In some cases, it takes a while before a plaintiff actually gets a settlement or award. This happens if the settlement amount is appealed, or if the settlement is subject to review. This may create additional financial hardships for plaintiffs who have been counting on getting settlements directly upon resolution of their cases.
In this scenario, a plaintiff may seek an additional cash, called post-settlement funding. Qualified applicants may receive funds to help tide them over until they actually receive proceeds from the settlement or judgment. Because this type of legal funding is available once litigation is complete, it is less expensive and less risky than pre-settlement funding.
Detractors and proponents
As with any other industry, the legal funding services industry has its share of critics and backers.
Historically, critics have claimed that the industry is unregulated. They have also claimed unscrupulous companies have taken advantage of unsuspecting plaintiffs by charging exorbitant interest. Moreover, critics have claimed that the overall cost of lawsuit funding is excessive.
Industry insiders say the critics who level these allegations fail to consider the nonrecourse nature of lawsuit funding and the amounts regularly forgiven by these companies.
Finally, industry insiders say lawsuit funding frequently draws criticism from insurance companies. Ironically, they note, these companies often profit from delaying settlements in personal injury cases.
On the other hand, proponents say legal funding is essential because it provides a much-needed service. They cite industry growth to back that claim. They also say that many legal funding companies not only engage in, but also promote transparency.
As an example of the latter, they cite an industry-led effort to create rules for legal funding disclosures on written contracts in New York State. The rules call for:
- A statement detailing the total amount to be advanced to the consumer
- Itemization of all relevant fees
- A statement detailing the type and calculation of applicable fees
- A statement detailing the total repayment amount, split into six month periods, and carried forward to three years following the contract date, including fees and a minimum payment amount
- The consumer’s right to rescind the deal within five days following execution
Relevant case law
While there are differing viewpoints in the court of public opinion, legal funding companies have recently garnered support in courts of law. Specifically, there have been two rulings in Georgia and New York in which courts have ruled in favor of lawsuit funders.
In one case in point, Ruth v. Cherokee Funding, a legal funding company advanced money at nearly 5%, a percentage deemed higher than a competitive rate. As a result, the plaintiff’s lawyer refused to repay at settlement because the agreement allegedly violated applicable state law.
However, the Georgia Supreme Court determined: “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 another victory for lawsuit funding companies, the New York Appellate Court refused to classify settlement “loans” as traditional loans in December2018. In Cash4cases v. Burnetti, the Court opined, “Although the interest rate was high, given the contingent nature of the transaction, the agreement was not overly unfavorable to defendant.”
Even so, lawsuit funding is not available in all states. Therefore, it is important that plaintiffs verify it is available where they live before filing an application.
Pre-settlement funding companies continue to help plaintiffs in need
This guide provides a comprehensive guide to lawsuit funding. If you or someone you love is involved in a pending personal injury lawsuit and you have a personal injury attorney feel free to contact us. We appreciate your interest in lawsuit funding and we are happy to help if we can.
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 CO, IL, MN, MO, SC, WI and some OK residents, 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.