A new financial trend has emerged in the country’s justice system: legal funding. Five years ago, the concept was first emerging and now it has moved front and center in marketplace solutions for lawyers and their clients. Currently, more than 40,000 applications are being reviewed per month by industry leaders.
Without question, legal funding has gained a strong foothold in the legal system but there are still many misconceptions about this industry. While it is true that some problems did exist at first, arousing concern, many misconceptions now circulating through the legal community have no basis in fact.
At the exponential rate legal funding is growing, there is no time like the present to separate fact from fiction.
Plaintiffs are exploited through legal funding.
The most common misconception paints a picture of vulnerable plaintiffs being exploited when they are desperate for financial help and are least likely to make quality decisions. Many attorneys express concern that unscrupulous lenders could prey upon clients by using the plaintiffs’ legal dilemmas as an unfair advantage. The reality is, however, that these individuals who find themselves backed into a corner financially are able to use legal funding as an escape hatch while the wheels of justice slowly grind along.
For example, take the single mom who is working long hours to make ends meet for her family. She and her children live from one paycheck to the next, and there is no possibility of having any savings. With no financial cushion, an accident could put this woman into a financial tailspin from which she would never recover.
An attorney would likely represent her on a contingency basis for a percentage of the amount finally recovered, but her household and living expenses would continue to mount daily. How is this single mother expected to survive while her lawsuit slowly plods through the legal process?
Legal funding provides a way to give her an advance that will cover living expenses and provide a hedge against eviction or foreclosure. She can continue to feed her family and keep all bills current. Instead of being a tool to exploit vulnerable plaintiffs, legal funding becomes the safety net needed by people who do not have adequate resources to handle lengthy litigation by themselves. Instead of experiencing total financial collapse, plaintiffs can now handle a difficult financial situation with third-party funding.
Legal funding is the same as a loan.
At a glance, it may seem that legal funding has the same characteristics as a typical unsecured loan, but this is not the case. Legal funding is not a loan and is very different from traditional credit alternatives and loans. One of the main differences is that a loan must be paid back and usually requires monthly payments. Not so with legal funding advances such as settlement loans.
Previously, plaintiffs had to resort to using personal loans and credit cards to help pay for living costs while waiting for their legal case to be resolved. Then, even if their lawsuit was not successful, the individuals still had to pay back all the debt they had accrued.
Oftentimes, the little bit of financial help these individuals received by borrowing is dwarfed by massive problems down the road when their mounting personal debts demand payment. Many plaintiffs were in a much worse financial situation after the fact than the one in which they found themselves before they filed a lawsuit.
With legal funding, however, a struggling plaintiff completes an application with a third-party funder and, upon approval, gets a cash advance. No payments are required until the legal case is settled, whether that is a few months away or several years.
Additionally, it is important to note that no repayment of the advance is required if the plaintiff’s lawsuit is not successful for any reason. Repayment is only required if the lawsuit is successful. The companies that provide legal funding are for-profit operations, so it is understandable that fees are charged for their investment. Unlike regular lenders, though, the fees are often capped after a specified amount of time, taking the pressure off plaintiffs to settle their cases early.
Legal funding advances do not get reported to credit bureaus because they are not debt. Therefore, the credit ratings of plaintiffs who receive an advance are not adversely affected.
Moreover, the underwriting process for a legal funding advance is based solely on the merits of the legal suit. Contrast that with traditional banks that will not recognize a lawsuit as an asset when performing underwriting for a traditional loan. Given this information, it can clearly be seen that plaintiffs who might not qualify for a bank loan could qualify for legal funding.
Is legal funding a loan? No. It’s non-recourse debt that doesn’t require repayment unless a plaintiff’s lawsuit is successful.
Legal funding firms interfere in the law process.
Some law firms wrongly believe that funding companies begin to interfere with the legal process, so attorneys may be hesitant to recommend such funding to clients. The root of this misconception is a fear that the funder will begin to pressure the attorney to hurry and settle a lawsuit, so the funding advance can be repaid.
The reality is that funding companies do not get involved with the lawsuit. Lawyers and their clients make all settlement decisions and legal strategies. The American Legal Finance Association (ALFA) defines best practices that reinforce the concept of strict non-interference. This principle is being codified in the upcoming legislative framework to regulate legal funding companies.
Legal funding is unregulated and ripe for abuse.
While regulation and oversight might have been lacking in the beginning days of legal funding, the tide has turned, and practices are coming into place to help regulate the industry and protect plaintiffs. The industry’s trade association, ALFA, helped create best practices for the funding companies in New York.
Maine picked up the same agreement for use in regulating the industry in its state. Some of the requirements include a five-day cancellation period, an attorney’s written review of agreements, and full disclosure to clients.
Implication for attorneys
Attorneys can find legal funding to be just the answer their clients need to help alleviate the stress that financial difficulties bring. This not only lifts a burdensome distraction for attorneys, but helps the clients meet their living expenses. In addition, this freedom from financial oppression can buy more time for the attorneys to work and fight for fair and larger settlements.
Do You Need Legal Funding?
The Legal Funding Group’s approval process requires no credit checks and does not examine past financial history. Obtain a free assessment of your case today by calling us or filling out our quick and easy online application.