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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 Legal Funding Is Not the Problem Facing America’s Truckers

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

America’s trucking industry deserves a fair civil justice system. So do injured consumers. Those principles are not in conflict.

In his recent Transport Topics commentary, “Truckers Deserve Lawsuit Transparency,” American Trucking Associations Chairman Greg Hodgen raises concerns about third-party litigation financing. He describes hedge funds, private equity firms and foreign sovereign wealth funds investing in lawsuits for profit.

Those concerns deserve discussion. But that discussion becomes problematic when Consumer Legal Funding is swept into the same category.

They are fundamentally different products.

Consumer Legal Funding is not Wall Street financing a lawsuit. It is not a hedge fund paying attorneys’ fees or litigation expenses. And it does not give a funding company control over litigation strategy or settlement decisions.

Consumer Legal Funding provides relatively small amounts of financial assistance directly to individuals who have pending legal claims and need help paying ordinary household expenses while those claims are resolved.

Simply put, it is funding lives, not litigation.

Consider the Independent Truck Driver

The trucking industry itself provides a good example of why Consumer Legal Funding exists.

Consider an independent truck driver who is seriously injured when another vehicle runs a red light and crashes into his truck.

The accident was not his fault, but suddenly he cannot work.

For an independent driver, that can mean his income stops immediately. Yet his mortgage or rent remains due. He still has to buy groceries, keep the electricity on, make vehicle payments and support his family.

His attorney may be pursuing a legitimate claim against the responsible party, but claims do not get resolved overnight. The defendant may have the resources to wait months for a settlement. The independent truck driver may not.

A Consumer Legal Funding company might provide him with $4,000 to help pay those household expenses while his claim is pending.

That money does not pay his lawyer. It does not pay an expert witness. It does not finance the lawsuit. And the funding company does not tell his attorney how to handle the case or whether to accept a settlement.

It helps the truck driver keep his family financially stable while he waits for the legal system to work.

And because Consumer Legal Funding is non-recourse, if he receives no recovery from his legal claim, he owes the funding company nothing.

That truck driver is not part of the litigation financing problem described in Hodgen’s article. He is a consumer who needs financial help because of an accident that was not his fault.

The Distinction Matters

Hodgen describes investors “pouring money into civil litigation” and argues that outside capital can fuel inflated claims and settlement demands. He also raises concerns that third-party financiers can discourage settlements when their financial interests depend on obtaining a larger recovery.

Those concerns do not accurately describe Consumer Legal Funding.

Consumer Legal Funding companies do not determine whether a lawsuit is filed. They do not select the consumer’s attorney. They do not direct litigation strategy. They do not determine the value of a claim or decide whether a settlement should be accepted.

Those decisions remain with the consumer and the consumer’s attorney.

There is also an enormous difference in scale. Consumer Legal Funding typically involves relatively modest amounts, often approximately $3,000 to $5,000, provided directly to an individual consumer. Commercial litigation financing can involve millions of dollars invested in individual lawsuits, law firms or portfolios of cases.

Policymakers should not treat those transactions as interchangeable simply because both have been placed under the broad umbrella of “litigation financing.”

Consumer Legal Funding Can Help Prevent Forced Settlements

There is another side to this debate that deserves greater attention.

Financial pressure can influence litigation decisions just as surely as outside investment can.

Imagine that independent truck driver again. His attorney believes the claim is worth substantially more than the insurance company is offering, but it may take another six months to reach a fair resolution.

The defendant can wait.

The truck driver facing next month’s mortgage payment may not be able to.

Without some financial breathing room, he could be forced to accept an early settlement, not because it fairly compensates him for his injuries, but because his family needs money immediately.

Consumer Legal Funding can help level that imbalance.

It does not guarantee a larger settlement. It simply gives the consumer something critically important: time to make a decision based on the merits of the claim rather than immediate financial desperation.

Non-Recourse Is Not Traditional Lending

Hodgen’s article also characterizes certain litigation financing arrangements as “predatory lending.”

But Consumer Legal Funding is fundamentally different from a traditional loan because repayment is contingent upon the consumer recovering proceeds from the underlying legal claim.

If there is no recovery, the consumer owes nothing.

The funding company therefore assumes the risk that it may receive less than the contracted amount or nothing at all.

That distinction matters and should be recognized when policymakers consider how these products should be treated.

Transparency Should Be Relevant to the Litigation

The article argues that litigation financing arrangements should be disclosed because defendants may otherwise be unaware that an outside party has a financial interest in a lawsuit.

That argument may be relevant when a commercial litigation financier possesses contractual rights that could influence litigation strategy or settlement.

Consumer Legal Funding presents a very different situation.

If the funding company cannot control the litigation, cannot select the attorney and cannot decide whether a consumer accepts a settlement, what legitimate purpose is served by automatically giving the defendant or its insurer access to the consumer’s private financial contract?

If a judge determines that a particular agreement is relevant to an issue in a case, normal discovery procedures can address it.

Automatic disclosure, however, could reveal something very different: how financially vulnerable the plaintiff is.

The defendant learning that an injured consumer needed funding to pay rent, utilities or groceries could gain information about how long that consumer can financially withstand litigation. That risks creating leverage for the very party with the resources to wait.

Truckers and Consumers Should Not Be Pitted Against Each Other

Hodgen makes an important point when he emphasizes that more than 90% of motor carriers operate 10 trucks or fewer.

Those businesses deserve protection from fraudulent lawsuits, staged accidents and abusive litigation practices.

But an independent truck driver injured through someone else’s negligence deserves protection too.

These goals can coexist.

Congress can address multimillion-dollar commercial investments in litigation without treating a $4,000 funding used to keep an injured family in its home as the same product.

It can demand transparency when outside investors exercise control or influence over litigation without automatically exposing an individual consumer’s personal financial circumstances to defendants and insurance companies.

Regulate the Product, Not the Label

The real problem is that “third-party litigation financing” has become an umbrella term covering very different products.

Policymakers should distinguish between commercial litigation financing, where institutional capital may finance litigation, law firms or portfolios of cases, and Consumer Legal Funding, where relatively small amounts are provided directly to individuals for personal and household expenses.

Hodgen concludes his article by calling for “transparency, accountability and fairness in our courts.”

We agree.

But fairness requires precision.

A hedge fund investing millions of dollars in litigation is not the same as an independent truck driver receiving $4,000 to make his mortgage payment and put food on the table after an accident that was not his fault.

One is funding litigation. The other is helping fund someone's life while the litigation runs its course.

America’s truckers deserve a fair civil justice system. So do America’s consumers.

Protecting one does not require harming the other.

Consumer Legal Funding is not the problem. For consumers facing financial hardship through no fault of their own, it can be the lifeline that allows them to keep their families financially stable while they wait for the justice system to work.

Consumer

Consumer Legal Funding Is Not Third-Party Litigation Financing, ARC Argues

A new commentary pushes back on the tendency to lump consumer legal funding together with commercial third-party litigation financing, arguing the two are fundamentally different products that warrant different policy treatment.

Writing in The National Law Review, Eric K. Schuller, president of the Alliance for Responsible Consumer Legal Funding (ARC), contends that consumer legal funding (CLF) is a modest, non-recourse product that helps injured individuals cover household costs — rent, groceries, utilities, childcare — while their claims proceed, rather than an investment in the litigation itself. Typical transactions run $3,000 to $5,000, carry no repayment obligation if the case fails, and give the funder no control over legal strategy.

Commercial litigation finance, by contrast, involves institutional investors deploying millions into business disputes. On that basis, Schuller argues CLF cannot be blamed for a so-called "tort tax," since it neither causes accidents nor finances litigation expenses. "If Consumer Legal Funding disappeared tomorrow, accidents would still happen," he writes.

He points to state high-court decisions — Maslowski v. Prospect Funding Partners in Minnesota and Ruth v. Cherokee Funding in Georgia — and to states including Kansas, New York, California, and Georgia that regulate CLF separately, alongside a U.S. Government Accountability Office report describing commercial funding as institutional and corporate in nature. ARC says it supports responsible CLF regulation — licensing, plain-language contracts, cancellation rights, and prohibitions on controlling litigation — while opposing measures that treat CLF as commercial litigation finance.

Consumer

Independence Day Op-Ed Frames Consumer Legal Funding as the Freedom to Pursue Justice

In an Independence Day editorial, the Alliance for Responsible Consumer Legal Funding (ARC) argues that meaningful freedom includes the ability of injured Americans to pursue their legal claims without financial desperation forcing them into unfair settlements. The piece positions consumer legal funding as a practical tool for keeping the outcome of a case tied to its facts rather than to a plaintiff's bank balance.

Writing in the National Law Review, ARC president Eric Schuller contends that "justice delayed can quickly become justice denied when mounting bills force individuals into decisions they otherwise would never make." Defendants, he argues, understand this dynamic and can use the length of the civil justice process to pressure vulnerable plaintiffs into accepting less than their claims are worth.

Schuller distinguishes consumer legal funding from commercial litigation finance and traditional lending. These are typically small, non-recourse advances — often $3,000 to $5,000 — used for everyday necessities such as rent, groceries, and medical bills while a claim proceeds. Because the funding is non-recourse, a consumer who loses the underlying case owes nothing. ARC's guiding principle, he writes, is "Funding Lives, Not Litigation."

The editorial also makes the case for responsible oversight, endorsing disclosure requirements, attorney acknowledgment, and prohibitions on funders influencing litigation strategy — safeguards intended to protect consumers while preserving their access to the tool.