What is lawsuit funding and how does it work?
Mar 17, 2010
When accidents happen, there are times when it becomes necessary to hire the services of an attorney. Of course, one must take care to ensure that a lawyer with the proper experience, integrity and professional background is selected prior to cutting a check for the retainer fee; but what if there isn’t money available to file the case? Lawsuit funding may provide the funds needed.
Lawsuit funding, most often referred to as a “lawsuit loan” or “pre-settlement funding” is actually not a loan at all. Simply, pre-settlement funding is a nonrecourse cash advance predetermined and offered by a finance company to the client based upon the likelihood of successful outcome in the client’s favor as well as the probable duration of the case and estimated amount of the settlement that may be awarded to that client when the case concludes. Lawsuit funding is a win-win situation for the client, as he is able to get the money needed to stay in the lawsuit nonrecourse; meaning that if the case does not end in the client’s favor, he owes nothing to the finance company who granted the advance.
When the case does conclude in the client’s favor, the advance is paid back and any amount of money over and above the original advance and fees belongs to the client. Lawsuit funding is most often granted to claimants who have suffered a loss (i.e. due to personal injury, wrongful termination, worker’s compensation, etc.) and will agree to repay any advance given upon successful outcome of the case. Although the risk to the client is small, lawsuit funding is to be considered a last resort to fund a lawsuit and there are things to consider prior to signing a pre-settlement funding agreement.
The costs typically associated with a nonrecourse cash advance can be very high. Prior to entering into an agreement is wise to discuss how finance charges are calculated. Some funders will charge a flat fee, while still others accrue finance charges monthly. Monthly fees can result in huge costs at the end of a case if there is a long court battle and less of a settlement for the client. Unlike the low risk to the client, the risk to the funder can be extremely high. For this reason, the funder will scrutinize every aspect of the case and communicate thoroughly with the attorney or law firm involved to ensure that successful outcome on behalf of the client is likely.
In the event one chooses to use lawsuit funding, the client would simply contact a funder or broker who offers pre-settlement funding services to begin the process. Sometimes funders are referred by an attorney, but an attorney will never offer lawsuit funding as part of their services. Once beginning the process, the funder will contact the attorney or firm handling the case to obtain information that will be used to estimate the outcome of the case. Specifically, the value of the case to estimate what the probably monetary reward to the client will be.
A nonrecourse cash advance will then be offered to the client based upon this estimate and an agreement drafted with respect to repayment and finance charges. Upon settlement of the case, or when the defendant pays what is awarded the client after losing the case in court, the amount of the cash advance as well as the associated fees are paid directly to the funder. Again, if the client were to find the verdict was not in his favor, he would owe nothing to the funder. Lawsuit funding can be a useful method to obtain funding to continue a court case or to pay living expenses where personal finds are depleted, but the case must be strong and a successful outcome likely.