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Inflation, Recession, and Consumer Legal Funding

April 21, 2022

Inflation, Recession, and Consumer Legal Funding

More Americans than ever are living paycheck to paycheck. With inflation rising and a recession right around the corner—financial pressures on the average family are increasing. And lawsuits aren’t going anywhere, which is why Consumer Legal Funding is a vital and necessary option for average families seeking justice in a legal setting. Yet regulation threatens the availability and effectiveness of Consumer Legal Funding—with the potential to curtail justice for those of modest financial means. What Exactly is Consumer Legal Funding? Consumer Legal Funding is one of two common types of third-party legal funding. While Commercial Litigation Finance focuses on big-ticket commercial claims like insolvencies, IP, antitrust cases, etc.—Consumer Legal Funding exists to advance smaller cases impacting average individuals. Consumer Legal Funding cases may include personal injury, medical malpractice, contesting invoices, and other torts (cases where plaintiffs are trying to right a wrong done to them—often by a larger entity). Like Commercial Legal Funding, Consumer Legal Funding is offered on a non-recourse basis. This means:
  • Collateral is not required to secure funding
  • Money deployed is not paid back unless the case is successful
  • Funders are taking on most or all of the financial risk
Once deployed, funds from Consumer Legal Funding, also called Pre-Settlement Advances, can be used to cover non-legal expenses like rent or mortgage payments, medical bills, or groceries. This is of particular value to individuals who have been injured and are unable to work. At its core, third-party litigation funding is focused on increasing access to justice. In order to accomplish this goal, funders must make a profit for their investors. With that in mind, the higher potential for large awards makes Commercial Legal Funding more attractive to funders. This leaves Consumer Legal Funding struggling for mainstream acceptance and a wider client base. How likely is it that Consumer Legal Funding will grow and flourish due to financial stressors like COVID, an impending recession, and rampant inflation? The answer may depend on what happens regarding proposed increases in regulation across many jurisdictions. Do Americans Really Need Consumer Legal Funding? When we look at the statistics, it’s clear that there’s a need for third-party funding entities that focus on individuals and families. Some measures show economic recovery post-COVID. Unemployment numbers are falling, while the GDP is rising. At the same time, inflation has reached a staggering 8.5%, leaving nearly a third of adults in the US using credit cards and even loans to make ends meet between paychecks. In several states, more than half of adults have difficulty meeting monthly expenses due to loss of income. These include:
  • New York
  • Florida
  • Mississippi (with a staggering 70+%)
  • Nevada
  • Arkansas
  • Oklahoma
  • New Mexico
  • Louisiana
  • Alabama
  • New Jersey
  • Hawaii
  • West Virginia
  • California
  • Texas
  • South Carolina
Families are increasingly facing food insecurity and falling behind on rent or mortgage payments—which in turn can lead to homelessness. Additionally, about 2/3 of Americans do not have enough money set aside to cover an unexpected expense of $500. A necessary car repair, emergency room visit, or home appliance failure can set a family or individual back months. These circumstances can take a toll on health as well—with more than 80% of those with financial stress experiencing clinical anxiety. Over half of those dealing with chronic financial worry suffer from depression. When an emergency arises through no fault of a plaintiff, seeking legal recourse may be the only way to avoid destitution. The statistics on personal injuries in the US are sobering to say the least.
  • 31 million Americans are injured and require medical treatment annually.
  • Of those, 2 million require a hospital stay.
  • Truck accidents alone account for 5,000 deaths and 60,000 injuries annually.
  • Medical malpractice is involved in nearly 100,000 deaths a year.
But as legal costs rise and the timing of court cases remains unpredictable—not everyone has access to the legal remedies they seek. That’s why Consumer Legal Funding is so important. It’s also why the industry shouldn’t be watered down by unnecessary regulations. Who is Pushing for Increased Regulation of Consumer Legal Funding? As one might expect, the insurance industry has been the most vocal about regulating Consumer and Commercial types of Litigation Finance. There’s a particular focus on Consumer Legal Finance—perhaps in part because a wronged or injured individual may appear more sympathetic to juries or judges. In practice, Consumer Legal Funding leads to more meritorious cases being filed, with more and larger awards that insurers must then pay. While insurers can then offset these payouts by charging higher premiums, this can still impact the insurer’s bottom line as policyholders balk at rate increases. What States are Already Passing Increased CLF Regulations? Interestingly, the states listed above as those where citizens are financially struggling the most have significant overlap with those states that have already passed regulations controlling Consumer Legal Funding. These include:
  • Tennessee
  • Arkansas
  • Nevada
  • West Virginia
We see that in many cases, states with residents hit hardest by financial woes are also those imposing restrictions on the use of CLF. West Virginia and Arkansas, for example, have 18% and 17% rate caps, respectively. West Virginia ranks 6th nationally in terms of states with the highest poverty rate, just behind Arkansas at number 5. As this dichotomy obviously harms average Americans, we have to wonder—who exactly are such regulations designed to help? When posed with a question like this, we like to “follow the money.” Who is lobbying for such onerous regulations? The most prominent and powerful organization behind the push for CLF regulation is the U.S. Chamber of Commerce. The Chamber has been issuing a full court press against the Consumer Legal Funding industry (and to a somewhat lesser extent, the Commercial Litigation Finance industry) for years now, at both the state and federal level. And the reason the U.S. Chamber is so adamantly opposed to litigation funding? Two words: Big Insurance. Insurance companies are some of the lead backers of the Chamber of Commerce, and Big Insurance pays a hefty price when individuals have the means to bring cases to completion, and see larger payouts as a result. Insurance companies are incentivized to encourage swift endings to legal claims, where plaintiffs accept lowball offers in return for dropping their case. That is much less likely to happen if the plaintiff has access to Consumer Legal Funding. Remember, this funding is non-recourse, and can be spent on anything the plaintiff desires—rent, food, gas money, Christmas presents, etc. Less impecunious plaintiffs are less likely to settle for lowball offers, and that puts Big Insurance in a great big bind. With some wins under its belt in the aforementioned states, the Chamber is likely to continue its push for industry regulation for the foreseeable future. This has prompted the industry to come to the table on what it deems ‘common sense regulation.’ The Alliance for Responsible Consumer Legal Funding (ARC) – one of two industry trade groups – supports regulations that make CLF safer and easier for consumers to understand. Rather than focusing on fee caps or disclosure minutia, ARC is focused on industry best practices and on clearly spelling out the rights and obligations of those who use Consumer Legal Funding. This includes:
  • Disallowing referral fees, commission, or other adjacent payments such as experts or industry professionals giving testimony.
  • Prohibiting funders advertising in ways determined to be misleading or outright false.
  • Outlining Right of Recission provisions.
  • Ensuring that all fees and costs be reflected in written contracts, including recovery ownership of clients and funders.
  • Precluding third-party funders from decision making with regard to settlements or case strategy.
  • Requiring that funds be used for household needs rather than legal spending.
  • Including funders among those covered by attorney-client confidentiality.
  • Disallowing lawyers from seeking or having a financial interest in funding provided to clients by third-parties.
  • Necessitating attorneys be informed of funding contracts, and for lawyers to affirm that they were informed.
Several states have adopted ARC-approved legislation that increases protections for those who use Consumer Legal Funding.
  • Ohio
  • Nebraska
  • Main
  • Vermont
  • Oklahoma
These common-sense provisions are designed to improve transparency and enable clients to make informed decisions about whether or not to accept third-party funding as their case progresses. As Eric Schuller, President of ARC, noted: “Having a clear statute in place lets everyone know what they can and cannot do, and thereby removes any ambiguities that are associated with the product and industry.” Schuller also added, “To our knowledge, in the states that have passed reasonable regulations on the industry, there has not been a single complaint or issue since the statute has been in place.” Looking Ahead An academic study of CLF funder LawCash delivered some vital findings. First, the study found that the funder declined to fund roughly half the cases it was approached with. Defaults on awards or settlements cost the funder about 12% of its due revenue. Even profitable cases fell short of expectations—stemming from both client defaults and alternate arrangements made with clients. The study did not confirm or disprove an overall societal benefit to third-party legal funding. It did demonstrate that increased transparency and simplifying funding contracts carry benefits to consumers, as does regulation requiring lawyers to be more proactive in protecting clients. Ultimately, Consumer Legal Funding is a necessary, even essential part of leveling the playing field of our legal system. Regulation is increasingly becoming a tool leveraged by insurers to limit the amount of recourse available to those who have been injured, cheated, or otherwise wronged by larger entities. Let’s hope that more moderate minds prevail, and that CLF continues to ramp up consumer protections, while advancing access to justice.

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Announcements Consumer

Legal-Bay Expands Pre-Settlement Funding Services

By John Freund |

Legal-Bay announced an expansion of its legal funding services, aiming to offer clients more flexible options for pre-settlement funding. The move reflects rising demand from plaintiffs who need interim cash while cases progress and highlights the competitive dynamics in consumer legal funding.

According to the company, the initiative is intended to broaden availability of non-recourse advances and to streamline decisioning so applicants can access funds more predictably during litigation. Although the funder did not disclose detailed terms, the emphasis on flexibility suggests adjustments to how advances are sized and timed relative to case milestones, as well as potential enhancements to intake and support. For claimants, the changes could translate into more tailored funding paths during a period of financial strain.

A press release in PR Newswire states that Legal-Bay is expanding its legal funding services to provide clients with more flexible options for pre-settlement funding, signaling a renewed focus on access and responsiveness. The release characterizes the update as a client-centric step and reiterates the company’s commitment to supporting plaintiffs seeking bridge financing while their matters are pending. It does not enumerate product features, timelines or pricing, but it frames the initiative as an effort to meet a wider range of circumstances and case timelines.

For the litigation finance industry, expansions like this reinforce steady demand among cash-constrained plaintiffs and continued product iteration by consumer funders. If flexibility becomes a wider theme, expect tighter competition on approval speed, disclosures and service quality, alongside ongoing attention to compliance in states evaluating consumer legal funding rules.

Consumer

Legal Bay Pre-Settlement Funding Announces Registration in New States

By John Freund |

Legal Bay LLC, a leading national pre-settlement funding company, has announced compliance with new regulatory guidelines in California and Georgia effective January 1. The company is now registered and accepting applications in both states as part of its ongoing commitment to transparency, disclosure, and regulatory compliance within the legal funding industry. The announcement comes amid increased scrutiny of lawsuit loans and settlement funding arrangements by courts and lawmakers nationwide.

According to PR Newswire, recent legislation in California and Georgia has highlighted concerns surrounding disclosure practices, contract clarity, and consumer understanding of legal funding agreements. Both states have clarified that litigation finance is not a loan but a non-recourse agreement. Legal Bay maintains internal compliance protocols designed to ensure transparency, consumer protection, and adherence to applicable laws in every state where it operates.

Chris Janish, CEO of Legal Bay, emphasized that "legal funding is not a one-size-fits-all product," noting that state laws change and compliance expectations shift. He stated that the regulatory activity in 2025 has been the most significant in the industry in quite some time. With New York and California both passing bills enabling legal funding in their states, Janish expects more states to follow this national trend of validating legal funding.

Legal Bay through its funding division, LB Capital, has successfully registered to do business in California, Georgia, Missouri, Tennessee, and Oklahoma in 2025. The company's compliance team continues to work on registration in additional states in 2026 where state legislation mandates it. Legal Bay provides non-recourse pre-settlement funding to plaintiffs involved in personal injury, medical malpractice, wrongful termination, and other cases, with clients repaying funds only if they win their case.

Consumer

Joint Liability Proposals Threaten Consumer Legal Funding

By John Freund |

Consumer legal funding has increasingly become a focal point for legislative scrutiny, with some policymakers framing new regulations as necessary consumer protections. A recent commentary argues that one such proposal—imposing joint and several liability on consumer legal funding companies—may do more harm than good, ultimately restricting access to justice for the very consumers these laws are meant to protect.

At its core, the debate centers on whether funders should be held jointly and severally liable alongside plaintiffs for litigation outcomes or related conduct. Proponents of these measures suggest that attaching liability to funders would deter abusive practices and align incentives across the litigation ecosystem. Critics, however, warn that this approach misunderstands the role of consumer legal funding and risks destabilizing a market that many injured or financially vulnerable plaintiffs rely upon to pursue meritorious claims.

An article in National Law Review states that joint and several liability provisions would dramatically alter the risk profile for consumer legal funding companies, forcing them to assume exposure far beyond their contractual role as non-recourse financiers. The piece argues that such liability would likely lead to higher costs of capital, reduced availability of funding, or a wholesale exit of providers from certain jurisdictions. In turn, consumers who lack the means to sustain themselves financially during prolonged litigation could be left without viable alternatives, effectively pressuring them into premature or undervalued settlements.

The article also challenges the notion that consumer legal funding requires punitive regulation, pointing to existing disclosure requirements, contract oversight, and state-level consumer protection laws that already govern the industry. By layering on joint liability, legislators may unintentionally undermine these frameworks and introduce uncertainty that benefits defendants more than consumers. The author further notes that similar liability concepts are generally absent from other forms of non-recourse financing, raising questions about why legal funding is being singled out.