If you were to stop a random pedestrian and ask them about legal funding, you likely wouldn’t find out much relevant information.
This is because legal funding is such a new industry, and many people are unsure of what it actually is, or have a somewhat distorted idea.
Listed below are the three most common myths about legal funding, and rebuttals to each of the myths.
Next time you’re stopped on the street and asked about legal funding (I’m sure it happens to you all the time!), you’ll be able to give an accurate and informed answer!
Myth #1: Legal funding exploits plaintiffs
This is perhaps the biggest myth about legal funding, and it’s absolutely the most inaccurate statement.
Legal funding does not exploit plaintiffs. It empowers them.
Many plaintiffs who enter litigation have taken a very calculated risk. They know that litigation is expensive, and they know that lawsuits can take a long time to reach completion. Nonetheless, plaintiffs are willing to put time on the line to fight for their rights.
During this time period, plaintiffs may accumulate fees and debts related to their litigation. For example, a personal injury plaintiff may see a mounting pile of hospital bills; a medical malpractice plaintiff may receive endless phone calls from insurance companies. On top of these associated costs, plaintiffs are still acutely aware of their daily expenses and future legal fees.
Legal funding allows these plaintiffs immediate relief in the form of a cash advance.
With this money, a portion of the future expected settlement (the industry terminology for this specific type of legal finance is pre-settlement funding), plaintiffs can live a less stressful life. Moreover, they will not be burdened by the pressure of loan repayment.
This last point brings us to our next myth…
Myth #2: Legal funding is a loan
Legal funding may possess some loan-like features, but that does not make it a loan.
For example, through legal funding, plaintiffs and attorneys can access large sums of capital that can be used immediately to better their daily lives. A loan can provide a similar benefit.
However, much unlike a loan, the money that legal funding companies grant to plaintiffs and attorneys comes directly from future fee or settlement proceeds.
To put things more simply:
An attorney who receives legal funding will receive a cash advance on a portion of their future fee.
A plaintiff who receives legal funding will receive a cash advance on a portion of their future award.
Plaintiffs and attorneys who receive legal funding are receiving cash advances on their own future earnings.
In other words, a portion of the settlement, or attorney’s fee, is purchased by the legal funding company and paid in advance to the recipient of legal funding.
Because legal funding companies accept a greater risk than traditional lenders do, their fees are generally higher compared to traditional lenders. Many legal funding companies offer non-recourse advances; meaning that if a settlement does not pay out for some unforeseen reason, the funding company will accept full responsibility and repayment is unnecessary.
So, as you can see, though there are some similarities between loans and legal funding, there are also a great many differences.
This leaves us with one last myth…
Myth #3: Legal funding is actually…kind of illegal
Many critics to legal funding believe that the industry promotes champerty and maintenance. These (literally) medieval legal concepts make it illegal for non-lawyer parties to be in the courtroom or otherwise influence litigation. By this principle, the argument goes, legal funding should be considered illegal.
Of course, if courtrooms were to fully obey the rules of champerty and maintenance, many other parties would be forbidden from influencing litigation.
For example, insurance companies often cover the costs of certain defense cases; this would no longer be permitted. Friends and family often chip in to help pay for counsel; this would also be forbidden. Only the wealthiest potential litigants would be able to use the legal system, which would completely go against this country’s principles.
To avoid illegal and unethical actions in the land of legal funding, many states have passed independent measures to regulate the industry. Moreover, many legal funding firms have united to create ALFA, the American Legal Funding Association. The goal of this organization is to set an industry standard, and guarantee fair and ethical practices across the board.
Now you know the truth about legal funding!
But there’s always more to learn.
Check out our white paper on legal funding to get the full scoop on the industry – different types of funding, when to use them, and how they might be right for you.
If you thought this post was helpful or have any other myths you want to talk about, leave a message in the comments below!
Photo Credit: Themis by Rae Allen
Shayna Keyles has been keeping the world informed on the latest in legal finance with RD Legal Funding, LLC since 2012. She offers writing and content marketing tips at her website, www.contentliaison.com, and tweets at twitter.com/skliaison.