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The Fundamental Distinction Policymakers Cannot Ignore

By Eric Schuller |
February 23, 2026

The Fundamental Distinction Policymakers Cannot Ignore

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

If policymakers want to understand consumer legal funding, they should start with insurance, not lending. At first glance, insurance and consumer legal funding may appear unrelated. One protects against risk. The other provides funds to plaintiffs in pending lawsuits to help pay for their day-to-day expenses. But structurally, they share a defining characteristic: risk is assumed by the capital provider, not imposed on the consumer. That single feature separates consumer legal funding from loans and aligns it more closely with underwriting.

Public policy depends on accurate classification. When a product is mischaracterized, regulation can miss its mark. Consumer legal funding is frequently labeled a “loan,” yet its mechanics contradict that description. A loan creates a guaranteed repayment obligation. Consumer legal funding does not. To regulate wisely, lawmakers must understand that distinction.

Insurance is built on underwriting risk. An insurance company evaluates probabilities. It examines health risks, property risks, liability exposure, accident frequency. It prices policies accordingly. The insurer does not lend money to the policyholder. Instead, it assumes risk in exchange for compensation. If the insured event occurs, the insurer pays. If the event does not occur, the insurer retains the premium. In either case, the insurer’s business model depends on accepting uncertainty. Insurance is not debt. It is risk transfer.

Now consider consumer legal funding. A funding company evaluates a legal claim. It assesses liability, damages, collectability, procedural posture, and likely duration. It underwrites the case. Instead of collecting premiums, it provides monies to the plaintiff. Its return depends entirely on a defined event: recovery in the lawsuit. If recovery occurs, the provider receives its agreed return from the proceeds. If recovery does not occur, the provider receives nothing. The funding company has effectively underwritten litigation risk. That is not lending. That is risk assumption.

The central question in distinguishing loans from contingent capital is simple: Who bears the risk of failure? In a loan, the borrower bears the risk. Repayment is mandatory regardless of outcome. In insurance, the insurer bears the risk. Payment depends on whether a covered event occurs. In consumer legal funding, the funding company bears the risk. Repayment depends on whether the case succeeds. If a plaintiff loses their case, they owe nothing. There is no collection action, no wage garnishment, no deficiency balance. The capital provider absorbs the loss. That structure is fundamentally inconsistent with debt.

To see the contrast clearly, consider the defining characteristics of a traditional loan: an unconditional obligation to repay, repayment regardless of performance or outcome, interest accrual over time, recourse against income or assets, and credit-based underwriting. If you borrow money to open a business and the business fails, you still owe the bank. If you lose your job after taking out a personal loan, you still owe the lender. If you use a credit card and experience hardship, the balance remains. Debt survives failure. Consumer legal funding does not. If there is no recovery in the legal claim, there is no repayment obligation. That single fact removes the defining feature of a loan.

Insurance companies price risk across portfolios. Some claims will generate losses. Others will generate gains. Sustainability depends on aggregate performance. Consumer legal funding companies operate similarly. Some cases succeed. Others fail. Pricing reflects probability of recovery, expected timeline, and litigation risk. Like insurers, funding providers must absorb unsuccessful outcomes as part of their business model. If policymakers were to impose lending-style interest caps on insurance premiums, the insurance market would collapse. Premiums are not structured like loan interest because repayment is not guaranteed. Similarly, consumer legal funding cannot be evaluated as if repayment were certain. The risk of total loss is real. When regulation ignores that risk allocation, it misunderstands the economics.

Labeling consumer legal funding as a loan may appear harmless, but it has significant policy consequences. Lending regulations are built around products where repayment is guaranteed and borrowers bear default risk. Those regulations assume predictable interest accrual and enforceable repayment obligations. Consumer legal funding lacks those features. If policymakers apply lending frameworks to non-recourse, outcome-dependent arrangements, they risk imposing regulatory structures that do not fit the product, distorting pricing models built around risk of total loss, reducing availability of funding for injured consumers, and eliminating a non-recourse option that differs fundamentally from debt. Regulation should reflect economic reality, not rhetorical convenience.

For injured plaintiffs, litigation is rarely quick. Cases may take months or years to resolve. During that time, medical bills accumulate. Rent is due. Utilities must be paid. Families rely on a steady income that may no longer exist. Traditional loans require fixed repayment regardless of outcome. Insurance does not. Consumer legal funding does not. That distinction explains why some consumers choose it. They are not borrowing against wages or income. They are accessing funds tied to a potential asset — their legal claim. If that asset produces value, repayment occurs from that value. If it does not, there is no personal debt. That is not debt stacking. It is risk sharing.

The core issue is risk transfer. Debt transfers risk to the borrower. Insurance transfers risk to the insurer. Consumer legal funding transfers litigation outcome risk to the funding company. The defining feature of a loan is an unconditional promise to repay. Without that promise, the structure changes entirely. If there is no recovery and the consumer owes nothing, the essential element of debt is absent. Policy debates should begin with that structural truth.

None of this suggests that consumer legal funding should operate without oversight. Transparent contracts, disclosure requirements, and consumer protections are appropriate in any financial arrangement. But regulation must match mechanics. Insurance is regulated as insurance because it is risk underwriting. Debt is regulated as lending because repayment is guaranteed. Consumer legal funding is non-recourse and outcome-dependent. It should be evaluated through that lens. When lawmakers start from the wrong definition, unintended consequences follow.

Consumer legal funding is non-recourse, payable only from legal proceeds, transfers outcome risk to the capital provider, and creates no unconditional repayment obligation. It shares structural similarities with insurance underwriting and other contingent compensation arrangements where payment depends on performance. The defining feature of a loan is guaranteed repayment. Consumer legal funding has no such guarantee. Before regulating it as debt, policymakers should ask a simple question: If the case fails and the consumer owes nothing, where is the loan? Sound public policy begins with structural accuracy.

About the author

Eric Schuller

Eric Schuller

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ARC’s Schuller Argues Consumer Legal Funding Safeguards Have Become a Bipartisan Settlement

The president of the Alliance for Responsible Consumer Legal Funding has argued that consumer protection and access to legal funding are not competing goals, pointing to near-identical safeguards enacted in states at opposite ends of the political spectrum.

Writing in the National Law Review, Eric Schuller compares the frameworks adopted in Kansas, Utah, California and New York and finds the same core provisions recurring regardless of which party controls the legislature. The starting point is the product itself: consumer legal funding is non-recourse, so repayment depends solely on the proceeds of the claim and a consumer who recovers nothing owes nothing.

From there, the statutes converge on disclosure. Kansas HB 2518 requires agreements to use "common, everyday language" and to state all charges and the maximum amount the consumer could owe; New York requires "common, understandable language" alongside a repayment schedule. Cancellation rights follow a similar pattern, with Kansas and New York providing ten business days, Utah HB 280 extending its window from five days to ten, and California allowing five business days to rescind.

Each state also builds in the claimant's attorney. Kansas requires an attorney acknowledgment confirming the disclosures were reviewed and that no referral fee was paid, without which the contract is null and void. All four bar funding companies from influencing the conduct, settlement or resolution of the claim, leaving those decisions with the consumer and counsel.

On enforcement, Kansas permits penalties of up to $10,000 per willful violation, California provides statutory damages and attorney's fees, and New York allows a company to forfeit its right to recovery.

Consumer

New York Times Investigation Examines Securitization of Consumer Legal Funding Advances

A New York Times investigation published Wednesday reports that some of the largest consumer legal funding companies are bundling cash advances made to personal injury plaintiffs into asset-backed securities sold to investors, and examines how that financing cycle interacts with a sharp rise in personal injury litigation.

As reported by The New York Times, reporters Ellen Gabler, Robert Gebeloff and Julie Tate identified six major funders that securitize their advances, accounting for more than 90% of advances nationwide according to industry trade group figures. The Times found more than two dozen securitization deals since 2020, representing hundreds of thousands of cases and raising $2.8 billion from investors. Advances carry fees and interest averaging 35% to 45% a year, and in one cited example a New York plaintiff who received $76,500 in advances owed at least $1.4 million by the time her case settled.

The article situates this alongside a 70% increase in personal injury filings in state courts over the past decade, and notes that since 2023 companies including Geico, Allstate, Uber and FedEx have brought at least 60 civil racketeering suits accusing lawyers and medical providers of inflating claims. Funders quoted in the piece dispute that fraud is widespread, with the American Legal Finance Association's Jack Kelly arguing that cutting off securitization would cut off the supply of money to victims. The Times also reports that more than a dozen states have restricted third-party litigation funding, with West Virginia the first to explicitly limit securitization.

The Alliance for Responsible Consumer Legal Funding responded to the report by calling for regulation rather than restriction.

"Some of the conduct described in The New York Times article is exactly the type of conduct responsible regulation should prevent," said Eric Schuller, President of the Alliance for Responsible Consumer Legal Funding. "New York has now put strong protections in place that directly address many of these concerns, while states such as Kansas have adopted similarly comprehensive regulatory frameworks. The answer is not to take Consumer Legal Funding away from injured consumers who need help paying their rent, mortgage, utilities or putting food on the table while their case moves through the legal system. The answer is to establish clear rules, enforce those rules and hold anyone who violates them accountable. Responsible regulation protects consumers while preserving access to Consumer Legal Funding for the people who truly need it."

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ARC Argues the Cost of Waiting Belongs in the Litigation Funding Debate

The Alliance for Responsible Consumer Legal Funding has published a commentary arguing that debates over litigation costs concentrate on indirect costs passed through the economy while overlooking the direct financial pressure on injured consumers waiting for their claims to resolve.

As reported by the National Law Review, the piece was written by Eric K. Schuller, president of ARC. It draws on U.S. Bureau of Labor Statistics data showing average household expenditures reached $78,535 in 2024, or roughly $6,545 a month, with housing averaging $2,189 per month, transportation $1,110 and food approximately $847. Extended across a claim's lifespan, ordinary household expenditures average about $157,070 over 24 months and $235,605 over 36 months.

Schuller cites the Federal Reserve's 2026 report on household economic well-being, which found that only 63% of adults said they could cover a $400 emergency expense entirely with cash or its equivalent. The commentary argues that if many households struggle to absorb a $400 shock, expecting an injured consumer to absorb months or years of reduced income while a claim moves through the system is unrealistic.

The article is careful to note that the figures do not suggest an injured consumer must replace every dollar of normal household spending. It describes Consumer Legal Funding as non-recourse and not used to pay attorneys, writing that the funds "can help consumers meet ordinary household obligations" and that "if there is no recovery, the consumer owes the funding company nothing."