Competing Considerations in Legal Funding

by LanceA on September 17, 2013

Pursuing legal action – especially against a big company – is a costly endeavour. Costly enough to put people off filing a lawsuit, even if they stand a very good chance of winning compensation, and costly enough to bring the legal process to a grinding halt before a case has been resolved. A common solution for people involved in personal injury lawsuits is to obtain financing from a legal funding company.

There’s no doubt that such loans are useful in certain circumstances. They’re generally approved or denied within a day or two, and only need to be repaid if the case is won. Legal funding companies describe ‘bridging the gap’ and ‘not settling for less’ – messages that seem to be getting through to the public, if the estimated $100 million annual net worth of the industry is anything to go by.

So how does it work? Plaintiffs who run into cash-flow problems simply fill out an online application with a lawsuit funding firm. Via in-house legal expertise and consultation with the plaintiff and their attorney, the firm assesses the likelihood of victory, agrees on a cut of any future jury award or settlement and gives the plaintiff X amount of dollars.

The industry describes itself as a public service, primarily offering funding for living expenses and rent or mortgage payments that hard-up litigants are having trouble meeting. But the legal funding business is not without its critics. States including Missouri, Texas and Indiana are in the midst of a fierce public debate about whether they should increase regulation for legal loan firms.

Legal Funding: The Case For

Let’s imagine a candidate for whom legal funding is the best option. Someone with a sure-fire personal injury lawsuit against a former employer that’s still a year from reaching court, but is virtually guaranteed to pay out big money. Their lawyer is working for contingency fees, but the plaintiff is unable to work in the industry he is qualified for, and has to take a low-paid job to support his family. Unfortunately, his drastically reduced wage is not enough to cover his mortgage, and the lender is threatening foreclosure. The plaintiff has no friends or family who can help financially, and a poor credit history prevents him obtaining credit from other sources.

For this guy, his only bankable asset is the compensation he is sure to win in the future. Legal funding firms don’t run credit or background checks; the capital they provide is contingent on a likely future outcome that will countermand any historical credit problems, which makes them markedly different to banks or other types of lender.

Another strong argument for legal funding is the level playing field it provides needy plaintiffs who are often facing huge companies with deep pockets. In personal injury lawsuits, legal loans can make the judicial system more about justice, and less about mere resource war. When a large company will surely lose a case, but their opponent has limited funds, the plaintiff is prone to accepting an unjust settlement. Defenders of legal funding say the industry militates against this type of outcome.

Legal Funding: The Case Against

Opponents take a different view, claiming that plaintiffs who have secured a legal loan are less likely to accept reasonable settlements because they have to forgo a higher percentage of their compensation. This can, according to critics, delay the legal process, causing courthouse logjams.

This desire for an inflated settlement is perhaps driven by the expensive interest rates incurred by legal loans. Some companies charge in excess of 100% annually, and plaintiffs at the end of a long legal battle can find themselves out of pocket even if they win the case.

For their part, legal funding firms defend the interest rates on the grounds that they are taking on most of the risk, since they see no return on their investment should the plaintiff lose their case. Unlike other financial products (such as mortgages), there is no guarantee of a legal funding company getting anything back.

Anti-legal funding lobbyists may have a fair point about regulation, and some legal funding firms are undoubtedly guilty of downplaying the true impact of their interest rates on the borrower. But what the industry’s critics are missing is the fact that there are an awful lot of cash-poor people out there with very strong personal injury or malpractice lawsuits on their hands. They’re facing huge corporations with multi-million dollar legal budgets, and yet can’t feed their own families. For people caught between this rock and hard place, winning compensation and paying out a significant percentage of it to a legal loan firm is a little softer-looking than staying at home with nothing at all.



Lance Andrews is a writer with Lawstreet Capital. As an advocate for patient safety and consumer rights, Lance’s goal is to raise awareness with regard to dangerous drugs, medical devices, and common products. His unique point of view blends years of hands-on medical training with a degree in journalism

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