Settlement Funding: Understanding No-Risk FinancingFebruary 27, 2013
Resolution of a catastrophic personal injury, class action, mass tort, qui tam or Federal Employers Liability Act (FELA) matter often takes several years to achieve. Many clients, particularly those bringing personal injury claims, find themselves unable to meet their financial obligations as they await settlement with their typically well-heeled adversaries. Paying for basic necessities can become an impossible burden, particularly for those claimants who are unable to work. Increasingly, plaintiffs are turning to advance lawsuit funding for financial assistance. Lawsuit advances are not loans: on the contrary, settlement advances provide no-risk financial assistance to litigants, enabling their attorneys to thoroughly pursue claims and maximize recovery.
Lawsuit advances differ significantly from traditional loans in several ways.
- First, a lawsuit advance is a non-recourse debt, meaning that the financing provider only recoups the money advanced if the plaintiff prevails by securing a settlement or damages award. Should the defendant prevail, the financing company may not seek repayment from either the plaintiff or the attorney. A traditional loan, on the other hand, requires repayment regardless of the client’s circumstances.
- Second, plaintiffs who obtain presettlement funding from a legal financing company do not make monthly payments as they would with a bank loan. The financing company is repaid only upon a favorable resolution, typically via an agreement that authorizes the plaintiff’s attorney to repay the funding company directly from the lawsuit proceeds.
- And finally, non-recourse legal funding also differs from a traditional loan in that approval for lawsuit advances is not based on factors such as employment, credit, or assets. Lawsuit financing companies instead use teams of legal professionals to evaluate the merits of an applicant’s case, the likelihood of success and the anticipated value of the matter in determining whether to provide funds to the applicant. Should funding be approved, the company will typically advance a certain percentage of the case’s estimated value within contractually specified parameters. When the case is resolved, the company will collect its agreed-upon portion of the proceeds. If the client does not receive compensation, the company may not seek repayment of the debt.
Some attorneys are hesitant to recommend settlement funding to their clients due to concerns about state usury laws. Non-recourse funding does not violate these laws, however. Because legal a financing company purchases an interest in the proceeds of a client’s case and pays the client in cash for that interest, the company is actually sharing the risk of loss or recovery with that client. And like the client, the funding company forfeits its investment in the case should the defendant prevail.
Further information regarding legal funding is available through the American Legal Finance Association (ALFA) at americanlegalfin.com.