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Fair Pre-Settlement Funding – An Oxymoron or a Viable Alternative?

June 28, 2023

Fair Pre-Settlement Funding – An Oxymoron or a Viable Alternative?

The following article was contributed by Julia DiCristofaro, program administrator at The Milestone Foundation. “I have a good client who is in need of pre-settlement funding, which I almost always advise against. But she is desperate, and this case will settle soon. Do you think you can help?” As program administrator of The Milestone Foundation, the only nonprofit providing pre-settlement funding to plaintiffs in need, I often hear this sentiment. Non-recourse, pre-settlement funding companies market themselves as quick cash options for plaintiffs who are awaiting their settlements.  It’s an easy lure for an individual who has undergone a catastrophic incident, one that has likely left them injured and unable to work, or facing mounting medical bills; someone who knows they will eventually receive a sum of money to live off of, but in the meantime, might not be able to afford groceries or rent. Pre-settlement funding, also referred to as litigation finance, has grown exponentially in the past decade and is now estimated to be a nine-figure industry. For many plaintiffs, this funding is a necessary lifeline to financially stay afloat as their case resolves. Yet, there are few regulations for this type of funding, often referred to as the “Wild West” of the lending industry. Murky contracts comprised of complex language, confusing terms, hidden fees, and complicated interest calculations are common features of these advances. When an individual is desperate to make ends meet, terms like “compounding interest,” “quarterly fees,” and “capped at three times the principal” fade into the background, as “cash in less than 24 hours,” “no credit checks,” and “if you don’t win your case, you don’t owe anything” catch their attention and provide a glimmer of hope. As many attorneys can attest, once a case settles and the payment is due to the lender, this lack of transparency often renders plaintiffs shocked to see that they now owe as much as $30,000 on the $10,000 advance they received. Plaintiffs can feel duped or betrayed, and oftentimes look to their attorneys to solve the problem by negotiating “haircuts” with the funder, or even waiving their own fees. An attorney practicing in New Mexico shared: “I had a client who recently received a $50,000 settlement. She owes $16,000 on a $5,000 advance she took out, and is panicking at how little money she’s actually going to receive. I think I am going to have to waive my fees on the case just to help her stay afloat.” It’s no wonder so many attorneys discourage their clients from taking these advances, though for many individuals, these funds are more critical now than ever. Plaintiffs have long been at a disadvantage when pursuing justice against deep-pocketed corporations that can make lowball offers in mediation, or await the time it takes to go in front of a jury. As with many facets of life, the Covid pandemic has played a role in shaping the civil justice landscape, as social distancing guidelines resulted in overloaded dockets and delayed court dates for civil cases. As a result, the advantage held by insurance companies and other defendants in personal injury cases has increased, as they continue to accept premiums and pay out less in settlements. Meanwhile, as government programs such as stimulus checks and eviction moratoriums expire, inflation continues to skyrocket, and savings dwindle, the majority of Americans are barely making ends meet; at the end of 2022, 64% of the U.S. population was living paycheck to paycheck, an increase from 61% in 2021 according to a recent LendingClub report. Much to the dismay of many experienced attorneys, these contrary factors – lengthened trial timelines and increased financial need – make non-recourse funding a necessary component of the civil litigation landscape. Given the oftentimes exploitative nature of non-recourse advances, many states have introduced legislation or enacted regulations to rein in the industry. For instance, in Colorado, some courts have voided or re-written individual litigation financing agreements as traditional loans subject to low-interest rate ceilings. While this helps plaintiffs avoid unfair and predatory rates, it also discourages many funders from assuming the risk that is inherent in non-recourse funding, leaving few options for these injured parties, who will then pressure their attorneys to settle their lawsuits – often to the detriment of their awards. Trade organizations such as The Alliance for Responsible Consumer Legal Funding (ARC) and American Legal Finance Association (ALFA), often lobby state legislatures to prevent restrictions on the litigation finance industry. They argue that the non-recourse nature of the lending requires their members to assume a high level of risk that justifies their practices, as the plaintiffs are only required to repay these advances using the proceeds from their lawsuit; in the instance of an unfavorable result, the lender does not recoup their advance. ARC states that they support legislation that “enacts robust consumer legal protection for consumer legal funding and maintains consumer access, because good legislation does both.” Both ARC and ALFA champion industry best practices and sponsor legislation to reflect these practices. ARC’s best practices range from recommending that contracts reflect all costs and fees – showing how much the consumer will owe every six months, and the maximum amount a provider may ever own of a recovery – to prohibiting attorneys from receiving referral fees or commissions from the companies their clients receive their funding from. To date, six states have enacted ARC-backed legislation, while other bills are being reviewed in states like Kansas and Rhode Island. While the activities undertaken by ARC and ALFA are adding regulatory measures to the industry, some might argue that they are not going as far as necessary to truly benefit plaintiffs who are utilizing this funding. Maximum payments and fees are listed in contracts, but they are generally not easily found on websites, making it difficult for plaintiffs to compare shops, or truly understand what they will owe until they go through the strenuous application and underwriting process. Additionally, these trade organizations do not make recommendations on interest rates or maximum repayment amounts, which enables their members to continue to charge exorbitant rates and fees. But that’s not to say there are no ethical lenders in the space. Some companies are instituting policies such as capping repayment amounts at two times the principal, offering advances with simple interest that is applied every six months, helping to identify government support, and introducing innovations like debit cards that enable borrowers to pay for basic necessities. Another viable alternative to unethical lending is The Milestone Foundation, formerly known as the Bairs Foundation, which was created six years ago to provide a plaintiff-focused option in the pre-litigation space. The only nonprofit providing low, simple interest pre-settlement advances, the foundation has helped more than 600 plaintiffs by advancing more than $4.8 million and is looking to expand its reach to serve more clients across the country. Steven Shapiro, partner at Ogborn Mihm LLP in Colorado, has seen firsthand the benefits, as well as the pitfalls, of pre-settlement funding. “My job as an attorney is to get my clients the award they deserve. If they don’t have the resources to pay their rent or buy their groceries, they are going to feel pressured to settle, and I won’t have the time I need to bring the case to a fair resolution.” Shapiro has at times seen clients with no alternative other than to take out advances with 30 to 40 percent interest rates; while painful at the time, these clients were able to see their cases through to a reasonable conclusion. He’s also seen The Milestone Foundation at work. He recounts his client Olga, a Russian-American woman disabled in a car accident, who was in need of funding. He referred her to The Milestone Foundation. “The foundation was able to provide Olga a reasonable advance at a reasonable rate, that enabled her to afford her living expenses for the duration of the case, which took about two years to settle and resulted in a seven-figure award. The contract was transparent and really the most wonderful thing. I would always opt to refer my clients to The Milestone Foundation rather than other lenders whose practices tend to be much more opaque.” While pre-settlement funding is often condemned by principled attorneys working to protect the best interests of their clients, ethical lenders like The Milestone Foundation are working to give the industry a new reputation. As the only nonprofit in the industry, The Milestone Foundation protects the interests of plaintiffs over profits, and hopes to inspire other entities to implement a similar approach toward pre-settlement funding.

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Consumer

What Happens to Consumers When Consumer Legal Funding Disappears

By Eric Schuller |

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

The Real-World Consequences of Over-Regulation and Misclassification

State lawmakers across the country are increasingly focused on how to regulate third-party financial activity connected to litigation. That attention is appropriate and necessary. However, when Consumer Legal Funding (CLF) is misclassified as a loan, conflicted with commercial litigation finance, or subjected to regulatory structures designed for fundamentally different financial products, the consequences fall not on providers, but on consumers who need it the most.

Consumer Legal Funding, Funding Lives, Not Litigation, exists to help individuals with pending legal claims meet basic household needs while their cases move through the legal system. These consumers are often recovering from serious injuries, unable to work, and facing mounting financial pressure. When CLF disappears due to over-regulation or misclassification, those consumers do not suddenly become financially secure. Instead, they are pushed into worse, more dangerous alternatives, or forced into decisions that undermine both their legal rights and their long-term financial stability.

Who Uses Consumer Legal Funding and Why

Consumers who turn to CLF are not seeking to finance their litigation. They are seeking financial stability. On average, CLF transactions range between $3,000 and $5,000. These monies are used for rent, mortgage payments, utilities, groceries, childcare, transportation, and medical co-pay. In many cases, it is differences between maintaining housing or facing eviction, between keeping a car or losing the ability to get to medical appointments or work.

CLF is non-recourse. If the consumer does not recover in their legal claim, they owe nothing. That structure places all financial risk on the provider, not the consumer. It is precisely this risk allocation that distinguishes CLF from loans and traditional credit products, and it is why courts and legislatures in numerous states have recognized that CLF is not a loan.

When lawmakers impose loan-based frameworks on CLF, including usury caps, amortization requirements, or repayment obligations disconnected from case outcomes, the product becomes economically impossible to offer. The result is not a cheaper product. The result is no product at all.

The Immediate Impact of CLF Disappearing

When CLF exits a state market, the effects are immediate and measurable.

First, consumer access disappears. Providers cannot operate under regulatory structures that ignore the non-recourse nature of the product. Capital exits the market, and consumers lose an option that previously helped them remain financially afloat during litigation.

Second, consumers are forced into inferior alternatives. Without CLF, injured individuals frequently turn to credit cards, payday lenders, installment loans, or borrowing from friends and family. These options often carry guaranteed repayment obligations, compounding interest, collection risk, and damage to credit. Unlike CLF, these products do not adjust based on whether the consumer recovers anything in their legal claim.

Third, financial pressure forces premature settlements. When consumers cannot meet basic living expenses, they are more likely to accept early, undervalued settlements simply to survive. This undermines the fairness of the civil justice system and benefits defendants and insurers, not injured parties or the courts.

Misclassification Harms the Most Vulnerable Consumers

The consumers most harmed by the elimination of CLF are those with the fewest alternatives. These are individuals with limited savings, limited access to traditional credit, and limited ability to absorb income disruption following an injury.

Ironically, regulations intended to protect consumers often end up harming precisely the consumers they sought to help. When CLF is treated as a loan, the regulatory burden drives responsible providers out of the market while doing nothing to improve consumer outcomes. Consumers do not gain safer options. They lose transparent, regulated, non-recourse funding and are pushed toward products with higher risk and fewer protections.

This is not hypothetical. States that have enacted overly restrictive frameworks or applied inappropriate rate caps have seen providers exit, access shrink, and consumer choice vanish. The lesson is clear. When regulation ignores economic reality, consumers pay the price.

CLF Does Not Drive Litigation or Verdict Inflation

A common concern raised in policy debates is whether CLF encourages litigation, prolongs cases, or contributes to so-called nuclear verdicts. The evidence does not support these claims.

CLF is accessed after a legal claim already exists. It does not finance attorneys’ fees, court costs, or litigation strategy. Providers have no control over legal decisions, settlement timing, or trial outcomes. Their only interest is whether a consumer recovers at all.

Moreover, the small size of typical CLF transactions makes it implausible that they influence case strategy or verdict size. A $3,000 to $5,000 transaction used to pay rent or utilities does not drive multi-million-dollar litigation outcomes. Conflating CLF with commercial litigation finance obscures these realities and leads to policy mistakes.

A Better Path Forward for Policymakers

Legislators can protect consumers without eliminating CLF. States that have enacted thoughtful CLF statutes have focused on disclosure, transparency, contract clarity, and consumer choice, rather than imposing loan-based rate structures that do not fit a non-recourse product.

Effective regulation acknowledges three core principles. First, CLF is not a loan and should not be regulated as one. Second, consumers benefit from access to a regulated, transparent product rather than being pushed into worse alternatives. Third, clear rules provide stability for both consumers and providers.

When policymakers get this balance right, consumers retain access to a product that helps them weather one of the most difficult periods of their lives without distorting the justice system or creating unintended harm.

Conclusion

The issue confronting lawmakers is not whether Consumer Legal Funding should be subject to oversight, but whether existing and future frameworks accurately reflect how the product operates and whom it serves. When CLF is swept into regulatory regimes designed for loans or commercial litigation finance, the result is not improved consumer protection. It is the quiet elimination of a non-recourse option that many injured consumers rely on to remain financially stable while their legal claims are resolved.

Careful, informed policymaking requires recognizing that Consumer Legal Funding is distinct, limited in size, non-recourse, and consumer-facing. Regulation that acknowledges those characteristics preserves transparency and accountability without stripping consumers of choice or forcing them into riskier financial alternatives. When rules are tailored to economic reality rather than broad assumptions, consumers are better protected, markets remain stable, and the civil justice system functions as intended.

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.