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Does Consumer Legal Funding Put Consumers in Debt?

April 3, 2024

Does Consumer Legal Funding Put Consumers in Debt?

The following article was contributed by Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding (ARC). There has been a lot of discussion if Consumer legal funding is a loan and thereby creates debt for a consumer Consumer legal funding, sometimes called litigation funding or lawsuit funding, provides cash upfront to plaintiffs, to be used for household needs, which are involved in legal proceedings in exchange for a portion of the eventual settlement or judgment. It doesn’t create debt like a loan from a bank or credit card, these distinctions contribute to its classification as a unique financial product rather than a loan or debt.
  • Non-recourse nature: Unlike loans, where the consumer is personally liable for repayment regardless of the outcome, consumer legal funding is non-recourse. This means that if the plaintiff loses their case, they are not obligated to repay the funding. The repayment is contingent upon the success of the lawsuit.
  • No monthly payments: In a loan, borrowers usually make monthly payments to repay the principal amount plus interest. With consumer legal funding, there are usually no monthly payments required. Instead, repayment only occurs if and when the case is settled or won, and the repayment is often structured as a lump sum.
  • Risk sharing: Consumer legal funding providers assume a significant amount of risk by providing funds to plaintiffs who may not ultimately win their case. Unlike lenders who typically assess creditworthiness and require collateral, consumer legal funding companies evaluate the strength of the case and base their decision on the likelihood of success and not the creditworthiness of the consumer.
  • Not regulated as loans: Consumer legal funding is often subject to different regulations than loans. While loans are typically governed by banking and lending laws, consumer legal funding has its own set of regulations that ensures consumers are protected and the product is offered in a responsible manner.
Some of the other key differences between consumer legal funding and debt from a loan is in how repayment works. With a loan, the consumer borrows money and agrees to repay it with interest, regardless of the outcome of the situation, creating debt. However, with consumer legal funding, repayment is contingent upon the success of the case. If the consumer loses their case, they will not have to repay the funding. But if they win, they will have to pay back the amount funded, with fees that are known upfront. So, therefore consumer legal funding doesn’t create debt. Unlike Consumer legal funding, some loans can put consumers in a cycle of debt. The term cycle of debt refers to a pattern where individuals or households become trapped in a recurring pattern of borrowing money to meet financial obligations, only to find themselves in even greater debt over time. This cycle often involves:
  • Initial Borrowing: The cycle typically begins with an initial borrowing of money, such as taking out a loan, using a credit card, or obtaining other forms of credit to cover expenses or emergencies.
  • Accumulation of Interest and Fees: As time passes, the borrower may struggle to make timely payments on their debts, leading to the accumulation of interest charges, late fees, and other penalties.
  • Financial Strain: The increasing debt burden can put a strain on the borrower’s finances, making it difficult to cover basic living expenses and other financial obligations.
  • Additional Borrowing: To address their financial difficulties, borrowers may resort to additional borrowing or using high-cost forms of credit, such as payday loans or cash advances, to make ends meet.
  • Repayment Challenges: The cycle continues as the borrower struggles to keep up with mounting debt payments, leading to further financial stress and the need for more borrowing.
  • Escalating Debt: Without significant changes in financial habits or circumstances, the debt continues to escalate, with the borrower owing more money than they can realistically repay.
Breaking the cycle of debt often requires proactive steps such as budgeting, reducing expenses, increasing income, seeking financial counseling, and finding ways to pay down debt strategically. It may also involve negotiating with creditors, consolidating debts, or exploring debt relief options such as debt settlement or bankruptcy. Consumers who use Consumer legal funding are never placed in a cycle of debt. Consumer legal funding has many other positives to a consumer besides not placing them in debt.
  • Immediate Financial Assistance: Consumer legal funding provides plaintiffs with immediate cash to cover living expenses, medical bills, legal fees, and other costs associated with their lawsuit. This can be particularly helpful for individuals facing financial hardship due to their inability to work or other circumstances related to their legal case.
  • Non-Recourse: Consumer legal funding is non-recourse, meaning that if the plaintiff loses their case, they are not obligated to repay the funding. This reduces the financial risk for the plaintiff, as they only repay the funding if they win their case.
  • Leveling the Playing Field: Consumer legal funding can help level the playing field in legal disputes by providing plaintiffs with the financial resources to pursue their case effectively. This is particularly beneficial for individuals who are up against well-funded defendants or corporations.
  • No Upfront Costs: Unlike loans, consumer legal funding does not require upfront payments or monthly repayments. Instead, repayment is structured with a known outcome and amount.
Overall, consumer legal funding can be a valuable resource for plaintiffs in need of financial assistance during legal proceedings without putting them in debt. Eric Schuller President Alliance for Responsible Consumer Legal Funding (ARC)
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Consumer

Let’s Get the Definition Right: Litigation Financing is Not Consumer Legal Funding

By Eric Schuller |

The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

Across the country, in both state capitols and Washington, D.C., policymakers and courts are giving increasing attention to the question of “litigation financing” and whether disclosure requirements should apply. At the heart of this debate is a push for transparency, who is funding lawsuits, what contracts exist, and what parties are behind those agreements.

While the intent is understandable, the challenge lies in the lack of a consistent and precise definition of what “litigation financing” actually is. Too often, broad definitions sweep in products and services that were never intended to fall under that category, most notably Consumer Legal Funding. This misclassification has the potential to cause confusion in the law and, more importantly, harm consumers who rely on these funds to stay afloat financially while pursuing justice through the legal system.

As Aristotle observed, “The beginning of wisdom is the definition of terms.” Without careful definitions, good policy becomes impossible.

The Distinction Between Litigation Financing and Consumer Legal Funding

The difference between litigation financing and Consumer Legal Funding is both simple and significant.

Litigation financing, sometimes referred to as third-party litigation funding (TPLF), typically involves an outside party providing monies to attorneys or to plaintiffs’ firms to pay for the costs of bringing or defending lawsuits. These funds are used to pay legal fees, expert witnesses, discovery expenses, and other litigation-related costs. The funders, in turn, often seek a portion of the litigation’s proceeds if the case is successful. In short, this type of financing directly supports the litigation itself.

Consumer Legal Funding, on the other hand, serves an entirely different purpose. In these transactions, monies are provided directly to consumers, not attorneys, for personal use while their legal claim is pending. These funds are not used to pay legal fees or case expenses. Instead, consumers typically use them for necessities such as rent, mortgage payments, groceries, utilities, childcare, or car payments. Funding companies are not influencing the litigation but rather ensuring that individuals have the financial stability to see their case through to its conclusion without being forced into a premature settlement simply because they cannot afford to wait.

This is why treating Consumer Legal Funding as though it were litigation financing is both inaccurate and potentially harmful.

Legislative and Judicial Recognition of the Difference

Several states have already recognized and codified this critical distinction. States including Arizona, Colorado, Louisiana, and Kansas have examined disclosure requirements for litigation financing and have made it clear that Consumer Legal Funding is not subject to those laws. Their statutes expressly define litigation financing in a way that excludes consumer-focused products.

Courts have also weighed in. In Arizona, for example, the state’s rules of civil procedure expressly carve out Consumer Legal Funding, recognizing that these transactions are unrelated to litigation financing and should not be treated as such. Likewise, when the Texas Supreme Court considered proposed rules surrounding litigation financing, the Court ultimately declined to proceed. While no new rule was adopted, the process made clear that Consumer Legal Funding was not intended to be part of the conversation.

These examples demonstrate that policymakers and jurists, when carefully considering the issue, have consistently drawn a line between products that finance lawsuits and those that help consumers meet basic living expenses.

Why the Distinction Matters

The consequences of failing to make this distinction are not abstract, they are very real for consumers. If disclosure statutes or procedural rules are written too broadly, they risk sweeping in Consumer Legal Funding.

Disclosure requirements are aimed at uncovering potential conflicts of interest, undue influence over litigation strategy, or foreign investment in lawsuits. None of these concerns are relevant to Consumer Legal Funding, which provides personal financial support and, by statute in many states, explicitly forbids funders from controlling litigation decisions.

As Albert Einstein noted, “If you can’t explain it simply, you don’t understand it well enough.” When the difference between litigation financing and Consumer Legal Funding is explained simply, the distinction becomes obvious. One finances lawsuits, the other helps consumers survive.

A Clear Request to Policymakers

For these reasons, we respectfully urge legislators and courts, when drafting legislation or procedural rules regarding “litigation financing,” to clearly define the scope of what is being regulated. If the issue is the funding of litigation, then the measures should address the financing of litigation itself, not the consumer who is simply trying to pay everyday bills and keep a roof over their head while awaiting the resolution of a legal claim.

Clarity in definitions is not a minor issue; it is essential to ensure that the right problems are addressed with the right solutions. Broad, vague definitions risk collateral damage, undermining access to justice and harming the very individuals the legal system is meant to protect. By contrast, carefully tailored definitions ensure transparency in litigation financing while preserving critical financial tools for consumers.

Finally

The debate around litigation financing disclosure is an important one, but it must be approached with precision. Litigation financing and Consumer Legal Funding are two fundamentally different products that serve very different purposes. One finances lawsuits, the other helps individuals survive while waiting for justice.

It is important to begin with a clear definition. As Mark Twain wisely noted, “The difference between the almost right word and the right word is really a large matter, ’tis the difference between the lightning bug and the lightning.” If legislators and courts wish to regulate litigation financing, they must do so with precision, ensuring clarity in the law while also preserving the essential role that Consumer Legal Funding plays in supporting individuals and families during some of the most difficult periods of their lives.

Consumer

Critics Argue Litigation Funding May Lift Malpractice Insurance Premiums

By John Freund |
Healthcare malpractice insurers are re-evaluating how third-party litigation funding could alter claim dynamics, with potential knock‑on effects for premiums paid by physicians, hospitals, and allied providers. An article in South Florida Hospital News and Healthcare Report points out that for providers already facing staffing pressures and inflation in medical costs, even modest premium shifts can ripple through budgets. Patients may also feel indirect effects if coverage affordability influences provider supply, practice patterns, or defensive medicine. While clearly antagonistic towards the industry, the piece outlines how prolonged discovery, additional expert testimony, and higher damages demands can flow through to insurers’ loss ratios and reserving assumptions, which ultimately inform premium filings. It also notes that providers could see higher deductibles or retentions as carriers adjust terms, while some plaintiffs may gain greater access to counsel and case development resources. For litigation funders, med-mal remains a critical niche. Watch for state-level disclosure rules, court practices around admissibility of funding, and evolving ethical guidance—factors that will shape capital flows into healthcare disputes and the trajectory of malpractice premiums over the next few renewal cycles.
Consumer

Consumer Legal Funding: Support for People, Not Control Over Litigation

By Eric Schuller |

The following was contributed by Eric K. Schuller, President, The Alliance for Responsible Consumer Legal Funding (ARC).

Summary: Consumer legal funding (CLF) is a non-recourse financial product that helps people meet essential living expenses while their legal claims are pending. It does not finance lawsuits, dictate strategy, or control settlements. In fact, every state that has enacted CLF statutes has explicitly banned providers from influencing the litigation process.

1) What Consumer Legal Funding Is

CLF provides modest, non-recourse financial assistance, typically a few thousand dollars to individuals awaiting resolution of a claim. These funds are used for rent, food, childcare, or car payments, not for legal fees or trial costs. If the case is lost, the consumer owes nothing.

CLF is not an investment in lawsuits or law firms, it is an investment in the consumer. 

2) Why Control Is Banned

The attorney–client relationship is central to the justice system. CLF statutes protect it by prohibiting funders from interfering. Common provisions include:
- No control over litigation strategy or settlement.
- No right to select attorneys or direct discovery.
- No settlement vetoes. Only the client, guided by counsel, makes those decisions.
- No fee-sharing or referral payments.
- No practice of law. Funders cannot provide legal advice.

These bans are spelled out in statutes across the country. Violating them exposes providers to penalties, voided contracts, and regulatory action.

3) Non-Recourse Structure Removes Leverage

Control requires leverage, but CLF offers none. Because repayment is only due if the consumer recovers, providers cannot demand monthly payments or seize assets. They do not fund litigation costs, so they cannot threaten to cut off discovery or expert testimony. The consumer retains ownership of the claim and full authority over all decisions.

4) Ethical Safeguards Reinforce Statutes

Even without statutory language, attorney ethics rules bar outside influence:
- Lawyers must exercise independent judgment and loyalty to clients.
- Confidentiality rules prevent improper information-sharing.
- No fee-sharing with non-lawyers ensures funders cannot 'buy' influence.
- The decision to settle rests solely with the client, not third parties.

Together, these rules and statutes guarantee that litigation decisions remain with client and counsel.

5) Market Realities: Why Control Makes No Sense

CLF contracts are relatively small, especially compared to the cost of litigation. They are designed to cover groceries and rent, not discovery budgets or jury consultants. Trying to control a case would be both unlawful and economically irrational.

Because repayment is contingent, funders want efficient and fair resolutions, not drawn-out litigation. Their interests align with consumers and counsel: achieving just outcomes at reasonable speed.

6) Addressing Misconceptions

- Myth: Funders push for bigger settlements.
  Fact: They cannot veto settlements. Dragging out cases only increases risk and cost.

- Myth: Funders get privileged information.
  Fact: Attorneys control disclosures; privilege remains intact. Access to limited case status updates does not confer control.

- Myth: CLF pressure consumers to reject fair settlements.
  Fact: Statutes forbid interference. And because advances are non-recourse, consumers are not personally liable beyond case proceeds.

- Myth: CLF is an assignment of the claim.
  Fact: Consumers remain the sole parties in interest. Providers have only a contingent repayment right.

7) How Statutes Work in Practice

States that regulate CLF typically require:
1. Plain-language contracts advising consumers to consult counsel.
2. Cooling-off periods for rescission.
3. Bright-line bans on control over strategy or settlement.
4. No fee-sharing or referral payments.
5. Regulatory oversight through registration or examination.
6. Civil remedies for violations.

This model balances access to financial stability with ironclad protections for litigation independence.

8) The Consumer’s Perspective

CLF does not alter case strategy; it alters life circumstances. Without it, many injured individuals face eviction, repossession, or the inability to pay basic bills. That pressure can lead to ‘forced settlements.' By covering essentials, CLF allows clients to consider their lawyer’s advice based on legal merits, not immediate financial desperation.

9) Compliance in Contracts

Standard CLF contracts reflect the law:
- Providers have no authority over legal decisions.
- Attorneys owe duties solely to clients.
- Terms granting control are void and unenforceable.

National providers adopt these clauses uniformly, even in states without explicit statutes, creating a strong industry baseline.

10) Enforcement and Oversight

Regulators can discipline providers, void unlawful terms, or impose penalties. Attorneys risk ethics sanctions if they allow third-party interference. Consumers may also have remedies under statute. These enforcement tools make attempted control both illegal and unprofitable.

11) Policy Rationale

Legislatures designed CLF frameworks to achieve two goals:
1. Preserve litigation integrity by keeping decisions between client and counsel.
2. Expand access to justice by giving consumers breathing room while claims proceed.

The explicit statutory bans on control ensure both goals are met.

Conclusion

Consumer legal funding is a support tool for people, not a lever over lawsuits. Statutes across the country make this crystal clear: CLF providers cannot influence litigation strategy, cannot veto settlements, and cannot practice law. The product is non-recourse, small in scale, and tightly regulated.

For consumers, CLF offers stability during difficult times. For the justice system, it preserves the attorney–client relationship and the independence of litigation. The result is access to justice without interference—because control of litigation is not only absent, but also expressly banned by law.