Access to justice shouldn’t depend on the size of your bank account. Yet for many individuals and businesses pursuing legitimate legal claims, the high cost of litigation creates an insurmountable barrier. Legal funding has emerged as a solution, providing financial support to plaintiffs and law firms while legal proceedings unfold.
Legal funding, also known as litigation finance or lawsuit funding, allows claimants to receive immediate cash advances against the potential settlement or judgment of their case. This financial tool has grown substantially over the past two decades, transforming how people approach costly legal battles. Understanding how legal funding works, who qualifies, and what it costs can help you make informed decisions about financing your legal claim.
What is legal funding?
Legal funding is a non-recourse cash advance provided to plaintiffs involved in pending litigation. Unlike traditional loans, legal funding doesn’t require monthly payments or credit checks. Instead, funding companies advance money to plaintiffs in exchange for a portion of the eventual settlement or court award.
The key feature that distinguishes legal funding from conventional loans is the non-recourse structure. If the plaintiff loses their case and receives no settlement or judgment, they typically owe nothing to the funding company. The funder assumes all the risk, which is why legal funding costs more than traditional financing options.
Legal funding can cover various expenses beyond legal fees, including medical bills, rent, mortgage payments, and day-to-day living costs. This financial cushion allows plaintiffs to avoid accepting lowball settlement offers out of desperation and to wait for fair compensation.
How does legal funding work?
The legal funding process typically follows several straightforward steps. First, a plaintiff applies to a legal funding company by submitting details about their case, including the type of claim, estimated settlement value, and attorney information.
The funding company then evaluates the case merit by reviewing documentation and consulting with the plaintiff’s attorney. This assessment focuses on the likelihood of success and the potential settlement amount. Funding companies typically approve cases with strong evidence, clear liability, and substantial damage claims.
Once approved, the plaintiff receives a cash advance, usually within 24 to 48 hours. The amount varies based on the estimated case value but typically ranges from $500 to $500,000 for personal injury claims. Commercial litigation funding can reach millions of dollars.
Throughout the legal proceedings, the plaintiff owes no monthly payments. When the case concludes, the funding company receives its principal advance plus accrued fees from the settlement or judgment proceeds. If the plaintiff loses, they walk away owing nothing.
Who qualifies for legal funding?
Legal funding is available for various case types, though personal injury claims represent the majority of funded cases. Common qualifying cases include:
Personal injury claims: Car accidents, slip and fall incidents, medical malpractice, and workplace injuries frequently qualify for legal funding. These cases often have clear damages and predictable settlement ranges.
Mass tort litigation: Plaintiffs involved in class action lawsuits or mass tort cases, such as defective product claims or pharmaceutical litigation, can access funding while awaiting resolution.
Commercial litigation: Business disputes, breach of contract cases, and intellectual property claims may qualify for larger funding amounts through specialized commercial litigation finance.
Employment disputes: Wrongful termination, discrimination, and wage theft cases can qualify, though funding amounts tend to be smaller than personal injury claims.
Civil rights cases: Plaintiffs pursuing civil rights violations may access funding, particularly when cases involve significant damages.
To qualify, plaintiffs generally need legal representation from a licensed attorney. Funding companies require attorney cooperation to evaluate case merit and facilitate repayment from settlement proceeds. Cases must also demonstrate a reasonable likelihood of success and adequate potential settlement value to justify the funding company’s risk.
How much does legal funding cost?
Legal funding costs significantly more than traditional loans due to the non-recourse structure. Funding companies charge fees rather than interest rates, though the economic effect is similar. These fees compound over time, increasing the total repayment amount as the case progresses.
Industry data shows that legal funding fees typically range from 2% to 4% per month, translating to annual rates of 24% to 60% or higher. Some companies charge flat fees instead of monthly compounding rates. For example, a company might charge a 15% fee for the first six months, then 3% per month thereafter.
Consider a plaintiff who receives a $10,000 advance with a 3% monthly compounding fee. If the case settles after 12 months, the repayment amount would be approximately $14,257. After 24 months, that amount grows to about $20,328. The longer the case takes to resolve, the more expensive the funding becomes.
Several factors influence legal funding costs, including case type, estimated settlement value, case strength, and the funding company’s underwriting criteria. Stronger cases with higher settlement potential often receive more favorable rates.
Some states regulate legal funding fees, capping maximum charges to protect consumers. Arkansas, Nebraska, Tennessee, and Vermont have enacted legislation setting rate limits, typically between 30% and 60% annually. However, many states lack specific regulations, allowing funding companies to set their own fee structures.
Benefits of legal funding
Legal funding provides several advantages for plaintiffs navigating lengthy litigation. The most significant benefit is financial stability during the legal process. Many plaintiffs face mounting bills and lost income while their case proceeds, creating pressure to accept inadequate settlement offers. Legal funding relieves this pressure, allowing plaintiffs to hold out for fair compensation.
The non-recourse structure protects plaintiffs from financial loss if their case fails. Traditional loans require repayment regardless of case outcome, but legal funding eliminates this risk. Plaintiffs only repay the advance if they win or settle their case.
Legal funding also levels the playing field against well-funded defendants. Insurance companies and large corporations often use their financial resources to delay cases, hoping plaintiffs will settle cheaply out of desperation. Funding gives plaintiffs the financial endurance to withstand these tactics.
Additionally, legal funding requires no upfront costs, monthly payments, or credit checks. Approval depends entirely on case merit rather than the plaintiff’s financial history. This accessibility makes legal funding available to individuals who couldn’t qualify for traditional financing.
Drawbacks and considerations
Despite its benefits, legal funding has notable drawbacks. The most obvious concern is cost. Legal funding fees exceed traditional loan interest rates by a substantial margin, potentially consuming a significant portion of the settlement proceeds.
The compounding fee structure means costs escalate the longer a case takes to resolve. Plaintiffs should carefully consider whether they need funding and, if so, how much to borrow. Taking more than necessary or funding early in the litigation process can result in unnecessarily high costs.
Some legal funding agreements contain problematic terms, such as attorney liens that give funding companies direct access to settlement proceeds or provisions that allow funding companies to influence case decisions. Plaintiffs should carefully review all contract terms and consult with their attorney before signing.
Legal funding may also affect settlement negotiations. Defendants and their insurers sometimes view funded plaintiffs as desperate, potentially influencing settlement offers. However, funding can also signal that a plaintiff has the resources to take a case to trial, which may encourage better settlement offers.
Finally, legal funding reduces the net settlement amount the plaintiff ultimately receives. After paying attorney fees, case expenses, medical liens, and the funding company’s fees, the plaintiff’s take-home amount may be substantially less than the gross settlement.
How to choose a legal funding company
Selecting the right legal funding company requires careful research and comparison. Start by verifying the company’s reputation and credentials. Look for companies that are members of industry associations like the American Legal Finance Association (ALFA), which promotes ethical standards and transparency.
Compare fee structures across multiple companies. Request detailed cost breakdowns showing how fees accrue over different time periods. Ask whether fees compound monthly, quarterly, or annually, and whether there are any additional charges beyond the stated fee.
Review contract terms carefully, paying special attention to provisions regarding attorney liens, case control, and repayment calculations. Ensure you understand exactly how much you’ll owe under various settlement scenarios and timeframes.
Consider the company’s approval process and funding speed. Some companies provide same-day approvals and next-day funding, while others take several days. If you need money urgently, prioritize companies with faster turnaround times.
Ask about the company’s relationship with your attorney. Reputable funding companies work collaboratively with attorneys and respect their professional judgment. Be wary of companies that attempt to influence case strategy or settlement decisions.
Finally, explore alternatives before committing to legal funding. Some attorneys offer flexible fee arrangements, and family loans or personal financing may provide cheaper options for covering expenses during litigation.
The future of legal funding
The legal funding industry continues to evolve, with increased regulation and competition driving changes. More states are considering legislation to regulate fees and protect consumers, while industry groups are promoting voluntary ethical standards.
Technology is also transforming the industry, with artificial intelligence and data analytics helping funding companies evaluate cases more quickly and accurately. These innovations may lead to faster approvals, more competitive rates, and broader access to funding.
As legal funding becomes more mainstream, awareness and understanding continue to grow among plaintiffs, attorneys, and the public. This increased transparency helps consumers make better-informed decisions about whether legal funding makes sense for their situation.
Legal funding serves an important role in the justice system, providing access to those who might otherwise be unable to pursue legitimate claims. While not appropriate for every case or plaintiff, it remains a valuable tool for leveling the playing field and ensuring that financial resources don’t determine legal outcomes. By understanding how legal funding works, what it costs, and how to choose a reputable provider, plaintiffs can make informed decisions that protect their interests while pursuing the compensation they deserve.
