Financial funding called a lawsuit advance or pre-settlement funding makes money accessible to plaintiffs in lawsuits before their cases are settled. This is known as legal funding and enables plaintiffs to pay for the mounting costs that arise during lengthy legal processes. The arrangement is not without controversy, though, and laws governing such funding are not clear.
Obtaining Money Before a Settlement
It is common knowledge that lawsuits and ensuing litigation costs can become expensive and time-consuming. Even when a major verdict is handed down, or when it seems likely that a large settlement will be reached, a long-time period may pass before any money actually reaches the plaintiff or attorney. During this waiting period, however, life’s expenses will continue to accumulate and mount higher and higher.
Some options exist to help supplement and fill this time gap now. These options are known by names such as:
- Lawsuit loans
- Lawsuit advances
- Third-party consumer litigation financing
- Structured settlement loans
- Non-recourse loans
- Non-recourse advances
- Alternative litigation financing
Description of Pre-Settlement Funding
In explaining what pre-settlement funding is, one could say it is the action of receiving money in advance from an expected court award before a final decision in the case has been made. The money being advanced is not coming from the court or the defendant. Rather, the money is coming from a third-party company that will probably require certain documentation about the legal case. Such information as medical records and the like may need to be turned over by the plaintiff’s attorney during the process of approval for such funding.
If the legal case is won, the amount of money that has been advanced, plus the agreed-upon interest amount, will come out of the awarded funds and go to the third-party company that handled the pre-settlement funding. If, on the other hand, the case is not settled in favor of the plaintiff, there is typically no money owed.
According to the U.S. Chamber Institute for Legal Reform, the process revolves around hedge funds investing sums of money in legal suits in exchange for a portion of the final judgment or settlement. The institution says this type of lawsuit funding began in Australia and then spread to the United Kingdom, Canada, the U.S., Europe and Asia.
Are Legal Advances Loans?
The classification category into which these litigation advances fall has implications for both the consumer and the funder. Courts within the states are split on whether or not to consider legal advances as loans.
The financial funders are represented by a trade organization that claims the products are not loans and should not have the same regulations as loans. One of the main differences between litigation advances and loans is the factor that a legal advance does not have to be repaid if the court award or settlement never materializes should the plaintiff lose the legal case. Additionally, no credit checks are required for legal funding because the advances do not affect a consumer’s credit rating and no monthly payments are involved. Some states look at the arrangements as investments, not loans.
The Ohio Supreme Court voided a pre-settlement funding contract in 2003, declaring it to be a loan that violated Ohio’s usury laws. However, a Texas appellate court ruling on a case in 2006 declared that the lack of a requirement to repay the funds is proof that Texas usury laws do not apply.
Consumer Protection Guidelines
Because each state may view lawsuit advances in a different light, the resulting regulations or produce a “confusing patchwork of state laws on third-party litigation funding,” according to one law professor. A trade organization called the Alliance for Responsible Consumer Legal Funding (ARC) believes laws should provide definite and specific protections such as transparent contracts and plain English. The ARC notes that some states do have a high level of consumer protection. These include Ohio, Maine, Vermont, and Oklahoma.
According to a white paper written by the American Bar Association’s Commission on Ethics 20/20, legal funding products do fill a need. The commission warned, however, that attorneys must watch for red flags pointing to ethical issues. Attorneys should make sure the confidential information of each client is protected and ensure that a client fully understands all terms involved with entering into such agreements with legal funding and cash advance providers.
Trusted Settlement Loans from The Legal Funding Group
The Legal Funding Group offers settlement loans that are trusted and fully transparent. We follow all legal requirements when providing cash advances and loans to our clients. Our services are meant to help plaintiffs and attorneys find financial security during their litigation process.
If you are awaiting for a settlement to be reached or if a settlement has been reached but you are waiting for it to be processed, call us today.