What Is Legal Funding?

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What Is Legal Funding

Legal funding alleviates the pressure on attorneys by providing clients with the financial resources they need to let their case go its full course. It is not a loan, but rather an advance on a future lawsuit settlement, award or judgment.

Legal funding companies take a hands-off approach and never interfere with the attorney’s professional judgment. However, they are not without their critics.

Pre-trial Stage

Legal funding provides capital to plaintiffs in the form of a cash advance to pay for living expenses or to cover litigation costs until their case resolves. Funding providers may specialize in consumer lawsuit financing, which generally supports personal injury cases, or they may focus on commercial litigation funding to support companies with complex disputes and needs for working capital.

Litigation finance has been around since the 1990s, but it has recently become more popular. This is primarily because it offers yields that are often higher than those available in the stock market, making it a viable alternative investment for investors seeking to diversify their portfolios. For example, litigation funding firms such as Bentham IMF and Lake Whillans can offer investors returns of up to 18% – significantly higher than the average return on stocks.

Some attorneys are hesitant to recommend legal funding for their clients, fearing that the funding company will interfere with the case. However, this is a misguided concern. Most funding companies take a hands-off approach to the case and do not ask for frequent updates or interrogate the client. Instead, they provide cash advances to address pressing financial concerns so that the client can focus on the case and build a strong case.

Before the emergence of legal funding, plaintiffs had few options for addressing financial shortfalls that arise during the course of a lawsuit. Without this type of financing, many plaintiffs had to rely on credit cards or other forms of debt to cover bills. This can be particularly damaging when a plaintiff is injured and unable to earn a living. With the help of legal funding, plaintiffs can avoid bankruptcy and keep their debts under control.

It is important to note that legal funding does not constitute a loan and does not require monthly payments. The money provided by a legal funding company is an investment in the future value of the plaintiff’s case, and it is only paid back if and when the case is successfully resolved. In addition, legal funding is non-recourse, meaning that the plaintiff does not have to repay the money if they lose the case. This is in stark contrast to lawsuit loans, which usually require repayment regardless of the outcome of the lawsuit.

The Evolution of Legal Funding

The concept of legal funding has evolved significantly since its inception in the 1990s. Initially, it was a niche financial service, largely unknown outside of legal circles. Today, it has emerged as a critical tool for plaintiffs and attorneys alike, democratizing access to the legal system. The growth of legal funding reflects a broader recognition of the financial challenges many plaintiffs face, especially in prolonged legal battles.

Ethical Considerations and Industry Standards

As legal funding has grown in popularity, it has also attracted scrutiny regarding its ethical implications. Critics argue that it could potentially lead to conflicts of interest or encourage frivolous lawsuits. In response, the industry has developed stringent ethical standards and practices. These include transparent fee structures, non-interference in the legal process, and respect for the attorney-client relationship. Regulatory bodies and professional associations have also started to outline guidelines to ensure that legal funding remains a positive force within the legal system.

Types of Cases Supported by Legal Funding

Legal funding is not limited to personal injury cases. It encompasses a wide range of legal disputes, including commercial litigation, civil rights cases, and employment law disputes. Each type of case presents unique challenges and funding requirements, and legal funding companies have adapted to meet these diverse needs. This flexibility has made legal funding an indispensable resource for many different types of plaintiffs and law firms.

Impact on Plaintiffs and Law Firms

For plaintiffs, legal funding can be a lifeline, providing financial stability during uncertain times. It allows individuals to maintain their standard of living and meet their obligations while pursuing justice. For law firms, it offers a way to level the playing field, especially when going up against well-funded defendants. By removing financial pressure, legal funding enables attorneys to focus on securing the best possible outcome for their clients.