Imagine you have been injured in some way and the responsible party is a large company or wealthy individual. You think you can sue and win in court and your attorneys agree, but between legal costs and living expenses, you can’t afford to fight for years to get the payout.
Now, imagine that someone offers to give you cash now and be repaid when and if you win your case.
Stop imagining. Litigation financing, also called lawsuit financing or legal financing, is an emerging industry that provides money to help plaintiffs cover legal bills and living expenses while waiting to resolve their cases.
While new and somewhat controversial in the United States, it’s long been used in other countries and has been growing in popularity in America since appearing in the late 1990s.
The basic idea is straightforward: if someone has a legal claim for injury, such as one resulting from a car wreck, a legal financing company puts up money to pay for the injured party’s legal, living or other costs while the lawsuit is being pursued.
The money is treated as a non-recourse loan to be paid back if there is an eventual settlement.
Does It Level the Playing Field?
Litigation financing can help level the legal playing field for ordinary plaintiffs and well-funded defendants.
It can provide someone who lacks deep pockets the wherewithal to pursue a claim, or it can provide a plaintiff who prefers to have money now the option of collecting sooner rather than later.
What Litigation Financing Pays For
Legal financing isn’t just for attorney’s fees and court costs. The American Legal Financing Association, a group formed in 2004, says its members provide money to pay for plaintiffs’ medical care, cover children’s college expenses and make up overdue child support payments.
The group says one of its members claims over 62 percent of funds it hands out go to stop foreclosures or evictions.
For impoverished plaintiffs, the service can sometimes fill a need better than other financial institutions can. Banks, for instance, don’t consider potential lawsuit awards as good collateral for loans, so they won’t lend money to plaintiffs who lack good credit.
That is often the situation for people who are injured and can’t work or have large medical bills. Plaintiff’s attorneys, meanwhile, are barred by ethics rules from giving their clients money.
Does It Encourage Frivolous Lawsuits?
One criticism of legal financing is that it might encourage frivolous lawsuits. Arguments against this note that if a lawsuit fails, legal financing firms lose their investment — plaintiffs don’t have to repay money if cases are unsuccessful — so they are unlikely to back meritless causes.
Another issue is the cost to plaintiffs. Legal financing firms charge higher interest rates than banks, around 2 percent to 3 percent a month. If it takes a long time to settle or win a case, the plaintiff may receive little of the eventual proceeds.
And legal financing isn’t likely to be a gold mine for people who have been injured. One study reported cash advances average between $1,750 and $4,500 and rarely exceed $20,000. Advances were also typically less than 10 percent of the total estimated value of the claim.
A Side Benefit
A side benefit of legal financing is that it can provide an attractive investment alternative. Legal judgments aren’t tied to the stock market, unemployment rate or any of the other factors that affect most investments.
For people seeking returns insulated from the economy, investing in legal financing is a promising — although not risk-free — option.
The Bottom Line
The basic concept of legal financing isn’t completely new. Personal injury attorneys routinely take cases on contingency, paying legal expenses out of their pockets and foregoing their own fees until the case is settled.
Many cash-strapped plaintiffs have also financed legal fees and living expenses with bank loans (if their credit is good enough) or credit cards while waiting for their claims to be resolved.
But the idea of treating a potential lawsuit payout as an investment opportunity is relatively new, and, for better or for worse, it promises to change the way we use the courts to seek financial remedies.
“Lawsuit Financing Could Change the Way We Sue” was written by Mark Henricks.