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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

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.