How does lawsuit funding work?

by | Aug 17, 2021 | Finance Litigation, Pre-Settlement

If you have suffered a loss or injury because of somebody else’s carelessness, you might suddenly require cash to pay for a variety of unforeseen expenses – like lost salary or medical fees. Also, while your lawsuit is in progress, you might find it hard to cover your daily expenses – like groceries, utility bills and rent. Lawsuit funding is designed to help plaintiffs, who are expected to win a lawsuit judgment. This is what you need to know:

How Does Lawsuit Funding Work For Pre-Settlement Cases?

Once you have filed a lawsuit for personal injury, you submit a loan application to a lawsuit funding firm. The firm will assess your situation and calculate how much you are likely to receive from winning your case or negotiating a settlement (most personal injury lawsuits settle pretrial). Then, the firm will offer you a cash payment straightaway. In return, you consent to pay the firm that principal amount of money, and a funding charge from your settlement proceeds. Most of the time, you will not have to pay anything before your case is settled. The lending firm receives payment from the lawsuit judgment proceeds.

How Much it Costs to Borrow Against the Future Proceeds of Your Lawsuit

The monthly funding charge can range from two percent to four percent. This might seem fair on the face of it, however it amounts to a yearly percentage rate of twenty-seven percent to sixty percent. Given that lawsuits can drag on for years, it is feasible that you could have to repay two or three times the borrowed amount.

Paying the Lawsuit Funding Firm

You repay the loan from the settlement funds, once other costs are deducted. When a court judgment is obtained, or a settlement is reached with the defendant, certain costs will be covered immediately. Once these costs are settled, the lawsuit funding firm is paid from the remaining funds. These costs include:

-Liens for medical services you received from hospitals, doctors and other healthcare providers.

-The litigation costs, such as copy expenses, court expenses and process server expenses.

-The lawyer’s fee, which is usually thirty-three percent to fifty percent of any settlement you are awarded with personal injury lawsuits.

When the Case is Lost or Settles for Less Than the Owed Amount

One advantage for consumers is that, if your case is lost, you are not required to pay the loan back. Instead, the lender shoulders this risk and this is why lawsuit loans cost more than other kinds of loans. Similarly, if your case settles for a smaller than expected amount, you are not required to repay more than your settlement funds.

Eligibility Criteria for Lawsuit Funding

The creditworthiness of the plaintiff will not determine whether he or she secures a funding agreement. Rather, these agreements mainly factor in how strong the plaintiff’s case is. The lawsuit funding firm regards this agreement as an investment. Therefore, like any other investment, the firm wants reassuring that the funds it risks have a good chance of yielding a profit. To decide this, the firm hires an underwriting team who evaluate the case to gauge its likely return. When assessing a case to determine its suitability for lawsuit funding, the underwriters will consider a range of variables, such as:

-The Case Type – Cases that are most commonly eligible for lawsuit funding are those involving personal injury, or those where plaintiffs are likely to get cash settlements. These might include slip and fall accidents, vehicle collisions, negligence, property destruction and more. Certain lawsuit lenders offer funding for different kinds of cases, such as dangerous medical device, employment law or whistleblower cases. It might not be required for a case to be active in some situations. For example, some lawsuit funding firms have granted loans to people who pursued claims in the California PG&E Wildfire settlements, the American boy Scouts Chapter Eleven bankruptcy case, and in other class actions linked to product liability.

-The Current Litigation Status — With the majority of loans, claimants are required by the lenders to have active court cases and attorneys. For cases that have been filed already, the lender can partly depend on the legal firm’s analysis of their potential. Also, with cases that are currently in court, the lender will check that these cases are managed by reputable professionals, who are likely to achieve the desired goals.

-The Commitment of the Plaintiff — Based on the prospective client’s particular situation, a lawsuit loan might help them to cope with the exasperating, time consuming nature of resolving personal injury cases. Such plaintiffs are likely to permit the discovery and pretrial stages to develop fully, prior to demanding a settlement, when their finances are less of a distraction. Lawsuit funding can keep them dedicated to their case for enough time to reap the full financial rewards available.

-The Potential Settlement – Underwriters examine cases from multiple angles. They assess the predicted amount of compensation and carefully factor in the timeline of cases. They need to check that a case will yield a large enough settlement to pay for the lender’s interest, the lawsuit cost (including the lawyer’s fees), litigation expenses (like court reporters and travel) and related costs, such as protection letters sent to physicians who cared for the plaintiff following the accident.

-The Plaintiff’s Location — Lawsuit funding is still a fairly new service. In several jurisdictions, the regulations governing it have yet to catch up. Currently, lawsuit funding is not regulated by the federal government in a comparable way to other consumer lending products. Instead, regulation is handled by individual states and their court systems. By and large, judges and legislators agree that lawsuit funding differs from loans. Even in such jurisdictions though, rulemakers have incorporated some elements of consumer protection – like caps on charges, disclosure obligations and licensing. Lawsuit funding firms tend not to work in areas where the rules are less established.

-The Expertise of the Plaintiff’s Lawyer — If a personal injury case goes to court, a lawsuit funding firm will rarely agree to a loan if the plaintiff’s lawyer is uncooperative. Many lawsuit lenders want to deal with seasoned lawyers, with a solid history of representing personal injury plaintiffs. These professionals are familiar with presettlement funding and understand the benefits it offers to clients. Actually, many of these lawyers take contingency fee advances, so they can keep their firms running and pay the litigation costs, while they also wait for the case to settle.

The Drawbacks for Plaintiffs

When weighing up the merits of accessing the proceeds of an ongoing case, plaintiffs should consider the ramifications as well. By opting to use a lawsuit funding firm, plaintiffs forfeit the chance to earn a larger settlement in future, for an instant cash injection to pay for current needs — such as healthcare and replacing lost income. Also, plaintiffs should check that the firm is trustworthy and capable. You can boost your chance of discovering a reputable lender by ensuring that the firm is licensed, in line with state requirements. Moreover, it is best to work with firms that are members of industry trade groups, such as the ARC (Alliance for Responsible Consumer Legal Funding) or the ALFA (American Legal Finance Association). Both groups require their members to adopt a range of ethical practices. By selecting an affiliated firm, plaintiffs can be sure that it observes the highest industry standards.


Jessica Diaz, CFA

Financial Advisor

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• Masters in Business Administration

McGill University

• B.S. in Business Administration

University of Colorado


• Corporate Finance Advisor

8 Years

• Personal Finance Advisor

11 Years