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Both Law Firms and Plaintiffs Benefit from the Expanding Consumer Legal Funding Industry

May 20, 2021

Both Law Firms and Plaintiffs Benefit from the Expanding Consumer Legal Funding Industry

The following piece is a contribution by Charles W. Price, CEO of Capital Now Funding, LLC.  The following scenario was once all too common – plaintiffs injured in an accident, waiting impatiently for a complex lawsuit to settle. With the clock ticking and the plaintiff often unable to work, there was little they could do except wait for the phone to ring while medical and other bills kept piling up. Meanwhile, their attorneys must candidly tell them that it will be weeks to months or years before they might receive their settlement money. Faced with this situation, it was not at all surprising that clients grew increasingly frustrated, gradually giving way to worry, fear and anxiety. And dealing with this level of stress, plaintiffs were capable of placing unneeded pressure on their attorneys to settle before the legal process had fully played out. Attorneys, who naturally want to get the best possible settlement for their clients, were often faced with having to settle prematurely even though they knew that a much better resolution could soon be reached. Fortunately, a better solution has emerged in recent years that meets the needs of all parties – Consumer Legal Funding. Consumer Legal Funding is often mislabeled and referred to as a pre-settlement loan or a loan against a lawsuit, but it is not technically a loan. Consumer Legal Funding is legal funding that is advanced from a portion of the consumer’s future settlement proceeds. As defined by Eric Schuller with the Alliance for Responsible Consumer Legal Funding, providing a client with consumer legal funding is merely the purchase of an asset – a portion of the consumer’s future settlement proceeds. In essence, plaintiffs are borrowing from their own future settlement funds. How Do All Parties Benefit? The real story of consumer legal funding is best viewed in light of the benefits it provides. For the plaintiffs, the benefits include:
  • Immediate, much-needed financial assistance to pay medical, housing and living expenses while their legal claim is in process
  • Zero to no risk to the consumer, since consumer legal funding is non-recourse (which means that if the plaintiff loses the case, they do not have to pay the funding company back)
  • Better relationships with their attorneys, as attorneys generally play a positive role in approving consumer legal funding
  • Avoids the need to turn to other, riskier forms of borrowing, which may result in unnecessary debt
  • Plaintiffs are in a much better position to receive the best possible legal settlement
For attorneys representing the plaintiffs, the benefits include:
  • Reduced pressure to settle a case too soon and accept a settlement that is less than deserved
  • Adequate time to get the best possible outcome for clients
  • Immediate relief for plaintiff clients struggling with bill payments when they may be unable to work due to accident injuries
  • Better relationships with their clients, who need the legal funding as well as the added time for the attorney to properly settle their case
  • Improved communications with their clients during the course of the case, as clients who are under less financial pressure will make for a better settlement outcome
  • More favorable attorney reviews and increased referrals from happier clients
Understanding The Basics of Consumer Legal Funding Once you know how the consumer legal funding process works, it’s easy to see what a valuable solution it is for both plaintiffs and attorneys. Pre-settlement legal funding is a great description of this funding, because the funding company actually provides funds to a plaintiff prior to the legal settlement of their case. The pre-settlement funds are usually taken from the portion of the total funds that will be dispersed at the time the case is settled. Pre-settlement funds are intended to help a plaintiff cover medical and living expenses until the case settles and settlement funds are received. But it all begins with the attorneys. Why Law Firms Should Be Involved In The Process It is essential for the law firm to approve the funding amount given to the plaintiff, as the attorney must confirm that the case is legitimate and has a strong likelihood of being settled favorably. This approval by the attorney is the signal for the funding company that the plaintiff’s case is deserving of legal funding. Pre-settlement funds do not have to be repaid if the plaintiff were to lose the case. Most often, when the plaintiff wins or favorably settles their case, the attorney will repay the pre-settlement amount to the funding company out of the settlement funds at the time the case is settled. Clearly, providing plaintiffs with the ability to receive financial assistance while their legal claim is in process is a benefit when they have nowhere else to turn and no other assets of significance to leverage for capital. As The Consumer Legal Funding Industry Has Evolved, It Has Greatly Improved In the past, some attorneys may have been hesitant to recommend pre-settlement funding for their clients because they may have been concerned over the perception of getting involved in the process, or worried about it from an ethics compliance standpoint. However, over recent years, bar associations and state licensing agencies have upheld, and now agree, that pre-settlement legal funding is a highly beneficial product. Additionally, in the past, when there were not a lot of options for pre-settlement legal funding companies, clients may have been charged unnecessarily high fees and interest on funds with an indefinite payback period. As a result, if the case went on longer than expected, the client could be left with a payoff that was more than their settlement. This just isn’t the case any longer. As the industry has matured and evolved, products and options have improved. States have implemented laws regulating the amount of fees that can be charged by pre-settlement funding companies and have required increased disclosure and transparency. Additionally, the fees being charged have become more competitive, and companies like Capital Now Funding have joined the industry who are dedicated to providing fully transparent payoffs that are fixed for the life of the case with zero interest. What is most essential in order to benefit the consumer is that law firms have access to legal funding companies they trust and can recommend to their clients. It is important that the attorney helps their client properly evaluate the funding company. Always look for a legal funding company with positive reviews, and one that is forthcoming about its fee structure. Everyone Wins As an attorney or law firm, you’re only going to see the benefits of pre-settlement funding if you choose the right consumer legal funding provider. Different providers have different terms and conditions, different fees and interest rates, and different levels of service and communication. Make sure you choose a good fit for you and your clients’ needs. About the Author Charles W. Price is Chief Executive Officer of Capital Now Funding, LLC, a nationwide provider of pre-settlement funding for personal injury cases. Capital Now Funding provides industry leading Fixed Fee funding with zero interest, which protects clients and preserves their ultimate settlement amount. For more information, you can contact Charles at cwprice@capitalnowfunding.com.

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Consumer

Consumer Legal Funding Is Not a Loan, Courts and Economists Agree

By John Freund |

The debate over whether consumer legal funding should be classified as a loan continues to surface in regulatory and policy circles, but legal doctrine and economic analysis consistently point in the opposite direction. Consumer legal funding is a non-recourse financial transaction tied to the outcome of a legal claim. If the consumer does not recover in their case, they owe nothing. This defining feature alone places the product outside the traditional boundaries of consumer lending, which requires repayment regardless of outcome and typically involves credit underwriting, collateral, and enforceable debt obligations.

An article in the National Law Review explains that courts and legislatures across the United States have repeatedly recognized this distinction. Rather than viewing consumer legal funding as borrowed money, courts have treated these arrangements as the purchase of a contingent interest in a future settlement or judgment. Because repayment is entirely dependent on case success, judges have found that the economic substance of the transaction does not resemble a loan, nor does it fit neatly within existing consumer credit frameworks.

Judicial decisions from multiple jurisdictions underscore this point. Courts have emphasized that consumers face no personal liability, no collection efforts, and no obligation to repay from their own assets. These factors are incompatible with the legal definition of a loan, which presumes a fixed obligation to repay principal and interest. As a result, attempts to recharacterize consumer legal funding as lending have largely failed when scrutinized under established legal standards.

From an economic perspective, consumer legal funding plays a distinct role in the civil justice system. It provides liquidity to plaintiffs who may be facing prolonged litigation and financial pressure, often helping them avoid accepting premature or undervalued settlements. Treating these transactions as loans could impose regulatory requirements that are poorly suited to non-recourse funding and risk limiting consumer access to a product designed to mitigate imbalance between individual plaintiffs and well-resourced defendants.

Consumer

Legal-Bay Hails New York Litigation Funding Act as Industry Milestone

By John Freund |

Legal Bay has praised New York Governor Kathy Hochul for signing the New York Litigation Funding Act into law, describing the legislation as a landmark step that finally provides a clear regulatory framework for consumer litigation funding in the state. The new law represents a significant development for an industry that has operated for years amid legal uncertainty in one of the country’s most active litigation markets.

A Legal Bay press release notes that the legislation establishes a comprehensive set of consumer protections and regulatory standards governing litigation funding transactions in New York. Legal Bay characterized the law as the product of more than two decades of policy development and sustained advocacy efforts by industry participants and consumer access to justice groups. The company emphasized that the statute provides long needed clarity by formally recognizing consumer litigation funding as a non recourse financial transaction rather than a traditional loan.

Under the new framework, funded plaintiffs are only required to repay advances if they obtain a recovery in their legal claims. Supporters of the law argue that this distinction is critical in protecting consumers from additional financial risk while ensuring that individuals with meritorious claims are able to cover basic living expenses during the often lengthy litigation process. Legal Bay highlighted that litigation funding can help plaintiffs avoid accepting early settlements driven by financial pressure rather than the merits of their cases.

Legal Bay also acknowledged the role played by New York lawmakers in advancing the legislation through the state legislature, noting that the law strikes a balance between consumer protection and preserving access to funding. According to the company, the statute promotes transparency, fairness, and stability in a market that continues to grow in both size and sophistication.

Consumer

New York Enacts Consumer Litigation Funding Act Impacting Litigation Finance

By John Freund |

New York has enacted a new Consumer Litigation Funding Act, establishing a formal regulatory framework for third party litigation funding transactions involving consumers. The law, signed by Governor Kathy Hochul in December, introduces new registration requirements, disclosure obligations, and pricing restrictions aimed at increasing transparency and limiting costs for funded claimants.

As reported in Be Insure, litigation funders must register with the state and comply with detailed consumer protection rules. Funding agreements are required to clearly disclose the amount advanced, all fees and charges, and the total amount that may be owed if the case is successful.

Consumers must initial each page of the agreement and are granted a ten day cooling off period during which they may cancel the transaction without penalty. The law also prohibits funders from directing litigation strategy or interfering with the professional judgment of attorneys, preserving claimant and counsel independence.

One of the most significant provisions is a cap on the total charges a funder may collect, which is limited to 25 percent of the gross recovery. Prepayment penalties are unenforceable, and attorneys representing funded plaintiffs are prohibited from holding a financial interest in a litigation funding company. For the first time, consumer litigation funding in New York is brought under the state’s General Business Law, replacing years of relatively limited oversight with a comprehensive statutory regime.

Supporters of the legislation argue that the law addresses concerns about excessive costs and abusive practices while providing clarity for an industry that has operated in a regulatory gray area. Industry critics, however, have raised questions about whether pricing caps could restrict access to funding for higher risk claims.