What is Legal Funding?

Pre-Settlement Funding

The Landscape of Legal Funding

What is Pre-settlement lawsuit funding?  Essentially it is providing non-recourse cash advances, to an injured person with a lawsuit or claim in return for a promise to repay the advance after the lawsuit settles or winning a verdict in Court. As this is "non-recourse" funding, an injured person does not have to repay the advance if they are unsuccessful in the lawsuit, and only has to repay up to the amount of their share of the settlement in the event that the settlement is smaller than anticipated. The pre-settlement funding business has been thriving in the U.S. for over a decade and has become a prominent tool for trial lawyers in the new century. As the industry grew, regulations and standards were established which now govern the field at the State level.  While some States have regulated more than others, funding is still legal and profitable in most states.  In the battle for money damages in personal injury lawsuits, insurance companies have significant economic advantages over injured plaintiffs and often use plaintiffs’ economic hardships to their benefit. Settlement avoidance techniques can result in a desperate plaintiff accepting an offer far below case value. Simply stated, the typical plaintiff lacks the financial resources to wait out the process.  Enter lawsuit funding, a process that provides plaintiffs with timely and strategic cash advances that assist them in waiting out the process and allowing them to receive, hopefully, a larger settlement or verdict. Litigation attorneys across the country have recognized that lawsuit funding is an invaluable strategic tool that balances financial inequity between litigants, obtains needed assistance for their clients, and improves litigation results. 

Historically clients most often use the funds received to make mortgage or rent payments, pay medical bills, purchase food, car payments, tuition, or basically anything else they need. Legal funding is used to pay for life's necessities. Prior to applying for legal funding, it is common for the client to first turn to friends, credit cards, employers, or their community for financial assistance, but when these options are exhausted they find legal funding critically helpful and timely. The assistance  we provide gives them the means they need to keep their families and lives intact while they await a complete and fair resolution of their case.

How Pre-Settlement Lawsuit Funding Works

An injured person contacts a company that offers pre-settlement lawsuit funding, sometimes at the suggestion or recommendation of their attorney, and sometimes in response to a marketing campaign. The funding company then contacts the lawyer who is handling the case, and obtains all relevant available information about the case in order to carefully evaluate the likelihood of a successful resolution. Through methodical time proven underwriting the funding company estimates the value of the likely eventual settlement or verdict, and then offers a cash advance to the injured person based upon that estimate. In return for the funding the injured person pays a onetime fee as well as a monthly compounding interest rate that accrues each month the loan is outstanding. When the case settles, or the defendant pays a Court verdict, the loan and associated fees are paid to the funding company.

These advances are offered as non-recourse funding, which means that an injured person has no obligation to repay if the lawsuit is lost. Similarly, if the ultimate settlement or verdict is smaller than anticipated, the amount that must be repaid never exceeds the amount of the injured person's share of that verdict or settlement.

When Is Pre-Settlement Funding Appropriate?

Litigation can take a very long time. Sometimes, cases drag on for years. While cases are pending, even where an injured person's attorney is paying all of the legal expenses associated with the litigation, the injured person has to have enough money to get by. If the injured person is unable to work, has reduced income, or has expenses associated with care or disability, it may simply not be possible to wait until the end of the lawsuit before finding relief and obtaining funds.

Given the higher interest rate and fees involved in a pre-settlement funding, it is not uncommon for injured people to consider any available alternatives. However, injured parties even after being made fully aware of the applicable terms of their funding often find it to be a helpful, real alternative to suffering helplessly through their misfortune. It also serves to level the playing field so they can wait out common stall tactics by defendants and backlogged court dockets.   This type of financing is often a suffering injured party’s last resort.  Before the emergence of the Legal Funding Industry, little financial assistance was available to help injured plaintiffs survive financially while waiting years for their cases to be resolved. Ethics rules preclude an attorney from advancing money to his client.

   In addition, there was a distinct disadvantage in the settlement and overall litigation process for those who could not afford the luxury to wait for their attorney to reach a proper and just resolution of their case.

   There are a number of ways by which a plaintiff in a lawsuit can benefit from a legal funding through our company. Some of these can be listed as follows:

   -  Funding needed for surgical procedures for the plaintiff who would otherwise have no way to pay for it, thereby getting the needed medical procedure to improve his health and his own quality of life is a very common and positive benefit.

   -  Stopping a foreclosure action or an eviction from occurring is another positive benefit. Statistics provided from one of the larger firms within the Industry, demonstrate that over 62% of funds provided to plaintiffs are used to stop a foreclosure or an eviction action. Giving the plaintiff an advance to stop such action not only gives them the peace of mind to continue the case but allows their attorney time to get them the settlement that they deserve.

   -  Allowing a child to stay in college when the tuition bill comes due.

   -  Covering a delinquent child support payment.

   -  Giving the plaintiff time to stay in their case and fight and not fold, which allows their attorney to adjudicate the case in their best interest, without.

   -  Unfortunately, banks are unwilling to provide funds to a plaintiff who does not have good credit based on a claim in a lawsuit. Banks will not provide a loan under these circumstances because the credit risk in most cases involving an injured plaintiff, who is possibly jobless, is not acceptable to a bank. The banker sees the possible future proceeds of a case to be insufficient collateral.

Ethical Issues

A question that perhaps seems obvious is, why can't injured people simply borrow money from their wealthy lawyers? The answer is that state bar associations recognize that when a lawyer becomes a creditor to a client, a conflict of interest is created that may interfere with the attorney-client relationship.

FAQ

Does the funding industry take advantage of the less fortunate?

Answer: Quite the opposite. Our company, Washington Funding Services provides funding to plaintiffs who find themselves in very difficult financial situations. They have sustained an injury due to an accident beyond their control, and while awaiting resolution of their case and possible compensation for their injuries, they often find themselves financially strapped. Out of work and/or facing increased medical costs due to their injuries, clients suddenly find it difficult to make ends meet - to pay bills, keep their homes, and provide food for their families.

If cases were quickly resolved, the client might be able to endure this time of financial difficulty. Unfortunately, personal injury claims can take on an average three years to resolve. While well-funded defendants have the money and resources to maintain a lengthy legal battle, most often individual plaintiffs do not. For the client, this period of waiting can be quite a challenge, and might force a plaintiff to take a settlement below what they or their attorney think they should receive, simply because the client needs those funds to support the immediate financial needs of their family.

Instead of taking advantage of the less fortunate, legal finance provides the clients with the financial assistance to wait for a fair settlement from their case. Legal funding levels the playing field for these victims, so they can see their cases through to fair resolution.

Does non-recourse Legal Funding violate usury laws?

Answer: No. By providing legal funding against a pending case (more formally known as "non-recourse" Legal Finance) based on the future value of a case that may or may not ultimately be settled, we share the risk of recovery and/or loss together with the plaintiff and the attorney. In fact, courts throughout the United States have held that such "at risk" payments are not loans. Legal funding is "non-recourse", which means that the funding does not have to be repaid if the plaintiff does not prevail in their case. The fact that legal funding is "non-recourse" distinguishes it from a loan.

How does Washington Funding Services determine a client's eligibility for legal funding?

Answer: Washington Funding Services employs expert legal analysts, and attorneys who review the pending cases with a time proven underwriting process. Each applicant’s case is carefully screened and reviewed.  We examine legal documents, the applicant and we speak with the client's attorney. Only those plaintiffs with most meritorious cases and a good likelihood of success become eligible for legal funding support.

Why is Legal Funding to a plaintiff in litigation not considered a loan?

Answer: In almost all cases, legal funding is provided on a "non-recourse" basis. Non-recourse means that when Washington Funding Services provides a legal funding, if the client does not receive a cash settlement award upon resolution of their case, the client is not obligated to repay the legal funding. Because legal funding is made on a "non-recourse" basis, the funding company forfeits their entire amount of legal funding if the plaintiff is not successful in their lawsuit. A loan would require repayment of the funded amount even if the client lost their case.

Why can't plaintiffs seek financial assistance from banks through a traditional loan?

Answer: Pending lawsuits are not assets that banks recognize when determining an individual's qualification for a loan, because the pending lawsuit has an unknown outcome, an uncertain maturity date, and the applicant has no current means of repayment. In addition, the majority of legal fundings that we provide are relatively small and banks might find it uneconomical to process a large volume of small transactions.

Why is the price charged for Legal Fundings higher than traditional bank loan rates?

Answer: Traditional bank loans and legal funding are two very different types of transactions. Legal Funding Companies do not provide loans, and therefore traditional bank loan interest rates should not be compared to the pricing of legal funding transactions. However, the price for a legal funding is higher than the interest rate on a loan because the funding companies are taking a far greater risk of being paid back on a legal funding than the risk a bank takes on a loan. For example, if a person takes out a bank loan to buy a car but can't continue to make payments to repay the loan, the bank can repossess the car and sell it to pay the loan themselves. In contrast, in the case of a non-recourse funding, if a client loses their case and therefore their ability to repay the funding, the client does not have to pay it back and the funding company loses 100% of their money.

Is it harder to settle a case with a non-recourse legal funding in place?

Answer: Industry experience has shown that legal funding does not impact an attorney's ability to settle a case. Most companies average funded amount is equal to 10% of the estimated net value of the case. They do this for a couple of reasons. One is to minimize the obvious risk of loss that accompanies the funding of a case. Second, funding is provided only for life's necessities not for frivolous spending, nor as a replacement for the expected settlement value. By funding only a small percentage of a case's anticipated value, the legal funding does not jeopardize a client's willingness to continue with the case, nor does it place an undue repayment burden on the final settlement award which may otherwise interfere with the lawyer's ability to obtain a fair and just settlement.

Actually, we provide our clients with funds that greatly benefit the client's attorney, providing them the time to properly handle their cases toward a fair resolution without having to settle prematurely. We do not get involved in the legal aspects of the case whatsoever, nor do they have any say in the strategy, decision making, or the ultimate outcome of the cases.

Does the Legal Funding industry promote frivolous litigation?

Answer: Not at all. The non-recourse Legal Funding industry does not promote frivolous litigation and actually discourages it. If we encounter a frivolous case during our evaluation, we simply will not fund it. Besides being against public policy, frivolous cases also make very bad investments, since the overwhelming majority of them have low probability of success. By helping victims with compelling claims, we actually discourage frivolous litigation by denying frivolous cases any financial support. By facilitating a more direct, transparent and rational distribution of capital to plaintiffs, we enable a more balanced and efficient legal system, which is consistent with the realities and demands of a modern free market economy.

Does the Legal Funding industry actually encourage litigation?

Answer: Not at all. In fact, quite the opposite is true. We only fund a case after a claim has already started and the client has a lawyer, usually a number of months into litigation. We help victims with their basic financial needs during the often lengthy time it takes to resolve a case.

Why do Legal Funding companies charge high rates?

Answer: Overall, the pricing for legal funding is not high relative to the benefits provided the client and the attorney, and the risks assumed by our company. Specifically, pricing for legal funding is influenced by a number of factors; the quality of service provided to both the client and the attorney, the actual risk involved in the expected repayment of the advance, the cost of capital used for the fundings, marketing and operating costs, and the length of time between funding a case to the repayment. Since the birth of the legal funding industry, the cost of Legal Funding, and subsequently the pricing has declined as the industry has matured.