Is Lawsuit Funding Trustworthy and Legal?

February 16, 2021Daniel EichholzBlog

Lawsuit funding, also known as legal funding, has many benefits for both plaintiffs and their lawyers. This process makes capital available that allows plaintiffs to hold out for higher settlement amounts. Attorneys also benefit by having the funds to equitably compete against large corporations and insurance companies with deep pockets. By enabling litigation risks to be shared with a legal funder, law firms can then take their time building more robust cases. Additionally, plaintiffs are empowered to hold out for higher settlement amounts.

Unknown just a few decades back, legal funding has now served to reshape litigation, and it has become a multi-billion-dollar industry that is still growing. The current estimate is that this industry has reached the five-billion-dollar mark here in the United States. Yet, there are still myths surrounding lawsuit funding despite its undeniable foothold in the legal system. Some of these myths stem from earlier problems connected with its beginning, while others circulate throughout the legal community with no factual basis to support them.

The Industry’s Growth

Without question, lawsuit funding has flourished in this country. Class action lawsuits and private litigation cases have become the primary market for legal funding. Litigation frequently involves a very high cost combined with a very long protracted time frame. When these factors are coupled with the possibility of a zero return for attorneys who work on a contingency fee basis, one can easily see why litigation funding has gained such popularity among lawyers and plaintiffs. There is also attorney funding that aims to help law firms directly.

In general, the types of cases where consumers are aided by litigation financing include divorce, personal injury, and small civil claims. Many businesses that need to bring a legal case find commercial litigation financing a welcome aid.

In the United States, it has historically been “frowned upon” for any third party to provide encouragement or maintenance assistance toward filing a lawsuit. An additional taboo is the practice of exchanging the promise of a portion of judgment proceeds for financial help during a legal case. These untoward behaviors are referred to as maintenance and champerty. However, in recent times, a loosening of this stringent doctrine has given way to embracing lawsuit funding.

Myths and Criticisms of Lawsuit Funding

1. Plaintiffs are Exploited by Legal Funding

One of the most common misconceptions about legal funding is that it exploits vulnerable plaintiffs at a time when they are least able to make informed decisions. This misconception can lead attorneys to wrongly fear that their clients will be unfairly taken advantage of by an unscrupulous lender.

The reality is that many people who found themselves financially backed into a corner during a slow, tedious legal process were given financial relief through legal funding. When considering that an accident can easily strip away any financial cushion that may have existed, it is understandable that a victim can quickly spiral downhill. Even though lawyer fees may be handled on a contingency fee basis, the plaintiff’s everyday living costs are not put off during litigation, presenting a challenging financial dilemma.

Through a cash advance, legal funding allows for the payment of mounting bills, helps prevent foreclosure or possible eviction, and provides money for food and clothing for the victim and family members. Instead of exploiting vulnerable people, this type of lawsuit funding offers a safety net for those without the necessary financial resources to last through an extended litigation period.

2. Legal Funding Interferes With the Lawsuit Process

Some lawyers may be hesitant to suggest lawsuit funding to a client due to the incorrect belief that the company providing the funds will somehow interfere in the legal process. This misconception can stem from a fear that the funding provider will begin to exert pressure on the lawyer to hurry and settle a case to pay the company back.

However, the legal funder does not become involved in the lawsuit. The attorney and client exclusively plan all strategies and make all settlement decisions. Furthermore, the American Legal Finance Association (ALFA) has defined best practices to include strict non-interference. This rule is being included in codes that are being drawn up within the legislative framework that will regulate third-party legal funding companies.

3. Legal Funding Works Like a Loan

Through unfamiliarity, many individuals mistakenly confuse lawsuit funding with a conventional unsecured loan. The characteristics of each are quite different, though.

One of the main fundamental differences is that a traditional loan typically demands a monthly payment be made, and the full loan amount must eventually be paid back. Lawsuit funding does not have these two requirements. If the client’s lawsuit does not end successfully, the plaintiff is not required to repay the financial advance at all. Repayment is only required if the case successfully ends in a settlement or a court award.

Additionally, a credit check is not a requirement, and legal funding is not reported to credit bureaus. Therefore, no adverse effect can be made on a plaintiff’s credit rating from obtaining this type of cash advance.

The strength of the lawsuit itself is the basis for the underwriting of such a lawsuit advance. However, banks will not allow a lawsuit to stand as an asset when determining a person’s qualification for a conventional loan. Thus, a traditional loan may be completely unavailable for a plaintiff.

4. Legal Funding is not Regulated

There was very little to no regulation for lawsuit funding in the early stages. But those days are in the past, and the industry now has increasing regulation that works to help protect plaintiffs’ best interests.

Legislation has now been passed in many states to regulate legal funding. The principal aim has been to focus on consumers, not on commercial lawsuit financing. For example, several states have placed a cap on the percentage of interest a third-party funding company can charge a consumer. No federal regulations exist at this time, but “best practices” were established in August 2020 by the American Bar Association.

4. Lawsuit Funding is not Legal

Plaintiffs, attorneys, and law firms have the right to seek lawsuit funding. Only three states prohibit such funding: Tennessee, Colorado, and Maryland. Workers’ compensation cases fall into a category that 33 states believe should not use legal funding. Understandably, attorneys are barred in many jurisdictions from loaning money to clients.

Lawsuit funding fills a critical niche by allowing plaintiffs access to needed finances for personal expenses. Funding companies do not require the cash advance payback if the lawsuit is not successful for the plaintiff, providing further protection for consumers.

Can Funding Companies be Trusted?

Third-party litigation financing companies such as The Legal Funding Group provide a valuable service to accident victims who have been seriously injured due to another party’s negligence. The best way to determine if a funder can be trusted is to do your own research. When choosing a funding company, look for the following: