Lawsuit funding is gaining popularity all over the world. In the US alone, by conservative estimates, the industry is earning at least 2.3 billion dollars per year in legal funding, and its market capitalization is increasing with each passing year. Attorneys should consider the various advantages and risks associated with litigation funding when it comes to representing plaintiffs.
One major advantage of litigation funding for plaintiffs is that it can help close financial gaps. This helps ensure that the attorney and client remain on equal footing throughout the process.
Here’s a look at the basics of plaintiff funding, how it works, as well as some basic information every lawyer should have about the industry. So, let’s get into it.
What is lawsuit funding for plaintiffs?
Lawsuit funding is a type of financial arrangement designed to help plaintiffs cover their expenses during ongoing litigation. It is secured on the potential future proceeds of a legal case, and provided on a non-recourse basis, meaning that if the plaintiff fails to obtain compensation, the lender will not receive repayment.
As the risk is very high in these funding transactions, lenders typically charge high-interest rates. In case of successful claims, the claimant will lose a small portion of the legal proceeds to the funding provider if they fund with a legitimate firm.
Who is behind legal funding investments?
With time the market share of lawsuit funding is increasing. One of the factors responsible for it is the different sources investing in these cases. Some of the common sources include private equity firms and private individuals.
Some litigation funders invest in significant cases, such as product liability and class action settlements for hundreds of claimants at the same time. In contrast, others invest in smaller cases, such as automobile accidents, personal injury lawsuits, etc.
Larger lawsuit funding companies are interested in all types of plaintiff cases in which lawyers have a contingency fee arrangement with their clients, such as personal injury, slip and falls, and other physical injury-type cases.
Investors prefer contingency cases, as the stakes of the lawyers are involved in them. And the attorneys give their best to win these cases.
Can my client obtain plaintiff funding?
Any individual who is a victim or defendant in a personal injury suit or any entity involved in a legal case with merits is entitled to apply for lawsuit funding. In order to have a successful application, the following prerequisites are essential:
- An attorney. A lawyer provides the lawsuit details to the funding company for the loan request.
- Contingency arrangement. The attorney is paid only if the case is successful; hence the stake of the attorney is involved.
- A viable claim. The facts of the case are substantiated with strong evidence.
- $50,000 or settlement more value. The case must have a gross net of $50,000 or more.
- A defendant who can pay damages. In the majority of cases, the insurance company of the defendant pays the damages from the coverage.
How long does the lawsuit funding process take?
Lawsuit funding companies have streamlined the process to make it easy for the plaintiff to obtain the funding requested within a short span of time. On average, an application can be approved from 12 hours to 24 hours, depending on the requirements submitted and the complexity of the case under consideration.
If the applicant’s attorney submits the requirements to the lender, the legal team of the company reviews the prerequisites within a day or two and approves the case.
What type of cases do lenders finance the most?
Lawsuit funding companies finance a variety of legal cases. But the most common types of cases that get easy approval are personal injury cases like auto accidents, wrongful death, medical malpractice, and commercial premises liability.
Similarly, cases like discrimination (with a settlement offer rejected or accepted), police brutality (with video footage of the incident), and wrongful imprisonments are highly welcomed. These are cases where liability is generally less complicated to ascertain, damages are documented, and a high insurance policy is normally used to compensate the injured party.
Is lawsuit funding a loan?
Lawsuit funding also works differently than traditional banking loans, where credit and income are required, as well as collateral for the loan. Although, and for marketing reasons, they are also called lawsuit loans or settlement loans, they are not considered to be real loans.
Hence, the traditional state usury laws do not apply to settlement funding. Usury laws only apply to loans that have to be repaid under all circumstances, even if the case is lost. For this reason, the courts of law treat this type of funding as an investment and not as a bank loan.
Is lawsuit funding regulated?
Regulation of the litigation funding industry varies by state, and litigation funders are still largely left to self-regulate. The American Bar Association, “ABA,” in 2020, provided some guidance by adopting Best Practices for Third-Party Litigation Funding.
With the rise in market share, it is very likely, that the relevant stakeholders will enact rules and regulations to bring uniformity to the lawsuit lending industry.
Additionally, and even when unregulated, a legal funding company should protect the plaintiff and fully disclose the terms and fees associated with the funding agreement, including any interest and repayment requirements after the case resolves. Protection also covers offering capped rates on all funding agreements. Funding a client’s case with a lender that provides capped rates will protect them in the long term if the case takes longer than anticipated to resolve. This means that all rates and charges will stop at a designated time.
What else should I know?
As attorneys are responsible for protecting the client’s interest, it is essential to be fully aware of the legal funding industry so they can provide reliable advice to their clients. Both parties should be fully conversant with the practices of this market so they can make an informed decision.
Before referring a client to a lawsuit funding company, ensure they provide clear and transparent information about their underwriting process and their obligations as a lender, such as protection to all clients.
By operating within the bounds of the law and acting in the borrower’s best interest, a lawsuit funding company can build trust and credibility in the industry and provide a valuable financial solution for plaintiffs in need.
The takeaway
Although lawsuit loans are not regulated in many states, some companies charge high-interest rates. In spite of these issues, plaintiff funding with a trustworthy lender is a great initiative to provide financial support to claimants, especially those from low-income families. This is a great advantage and an intangible benefit to helping people in need.
Should the borrower not recover compensation, they can default on the loan, making it an excellent option for meritorious claimants to pursue their claims without worrying about financial hurdles.
As you learn more about your legal funding options, consider Baker Street Funding, which allows attorneys’ clients to receive advances at lower rates and capped in the third year of the loan.
Baker Street Funding’s plaintiff loans are non-recourse and competitively priced. This pricing may help ensure that your client receives more of his or her settlement money in the future while taking care of immediate finances now, which can help you work toward achieving a better monetary settlement overall.
