For today’s blog post, I want to try something a little bit different. We’re going to play a game.
You might be familiar with this one – it’s called “Two Truths and a Lie”, commonly played as an ice-breaker event. You can think of this as your ice-breaker introduction to legal funding, if you’re still pretty unfamiliar with the concept.
Legal funding is such a new industry that it can be difficult to separate fact from fiction. Not only is the industry shy of celebrating it’s 20th birthday in the United States, but it’s already developed multiple sub-industries. Figuring out the the precise nature of legal funding as a whole – not to mention the details of each sub-category of legal finance – can be quite a tedious task.
It shouldn’t be too hard, so go on, give it a try! Which ones are true, and which one is false?
Legal Funding Isn’t For Everyone
“Legal Funding,” “Litigation Financing,” and “Lawsuit Loans” Are The Same
Traditional Loans Are More Intensive Than Legal Funding
Here’s a little humorous intermission to give you time to think it over, before I let you see the answers.
Alright. That should have been plenty of time. Are you ready to test your answers against mine?
Legal Funding Isn’t For Everyone. TRUE!
As much as I wish this one were false, it isn’t.
Legal funding is NOT for everyone.
If you’re a plaintiff who is seeking an attorney to try a case, legal funding likely isn’t for you. A legal finance firm will not fund a case before it has been accepted by an attorney or by the courts.
If you’re a defense attorney coming from a well-funded defense firm, legal funding is not for you. You already have the funds to litigate your case successfully, and have no need for extra assistance. You’d be wasting both your time and the time of the funding company if you applied for financing.
If you’re a plaintiff’s attorney seeking fee acceleration on a settlement that will pay out within a few days time, you likely won’t receive legal funding. You would be setting yourself for unnecessary repayments and paperwork if you applied for legal funding in this situation.
While there are a few other instances where you won’t qualify for legal funding, there are plenty of other cases where you will. From pre-settlement and post-settlement funding, to appeals and judgment funding, there are legal funding options for almost every situation.
“Legal Funding,” “Litigation Financing”, and “Lawsuit Loans” Are All The Same. FALSE!
Legal Funding and Litigation Financing can be used interchangeably, but Lawsuit Loans are a completely different thing.
The key word here is “loans”.
Legal funding, also known as litigation finance, is a process by which a legal funding firm purchases legal receivables from a plaintiff or an attorney. Such receivables include an attorney fee attached to a settlement (post-settlement funding) or anticipated proceeds from ongoing litigation (pre-settlement funding) — and then advances that purchase amount to the client. Then, at a later date, the client will repay this advance, along with a pre-determined amount of discount, from proceeds of the settlement or judgement.
In some cases, legal funding is non-recourse. This can occur when a settlement or fee does not get paid for unforeseen, non-preventable reasons. When this happens, the client does not return the advance to the funding company.
This is NOT how a loan works.
Loans are given out regardless of whether or not a future sum in the form of a settlement, a fee, or otherwise will be paid to the client. At an agreed upon future date, the client is expected to repay the loan along with a predetermined amount of interest. The cost to the client is the entire loan amount, along with the interest amount. The loan is considered a cost, because there is no guarantee that the client will have future earnings equal to or greater than the loan amount.
So the next time you hear someone saying that “legal funding” is the same thing as a “lawsuit loan”, you can put them in their place.
Traditional Loans Are More Intensive Than Legal Funding. TRUE!
While traditional loans may be less expensive than legal funding, they’re also more intensive for attorneys.
It’s true, for example, that a personal loan might have an interest rate between 6-8%. And it’s true that legal funding firms generally have higher rates, which vary depending on the type of funding being offered.
However, higher premiums aside, legal funding firms make life much easier for attorneys who often don’t qualify for traditional funding like bank lines of credit and personal loans. That’s because loan companies often want something that most plaintiff’s attorneys don’t have: physical collateral. The majority of the time, plaintiffs’ attorneys who apply for loans will be rejected because of insufficient collateral.
Contingency fee attorneys more often than not rent their office space and other accommodations that they need to run a successful practice, leaving them without physical collateral. Their most valuable assets are not physical objects, but thoughts and documents: their case portfolio and their law practice. Banks don’t accept these as collateral.
Legal funding firms, on the other hand, do.
Legal funding companies were developed specifically to take legal assets as collateral to help attorneys struggling with cash flow issues get back on their feet and reinvest in their own practices. The industry expanded to helping the clients of these attorneys, as well, and today offers multiple types of customized funding options to contingency fee attorneys and plaintiffs.
Did you win the game? Were you able to guess which facts were indeed facts, and which was a fib? Do you have any other funding fictions that you’d like to see turned upside down? Do you know any other fun legal cartoons I can read?
Let me know by leaving a comment!
Photo Credit: image by smlp.co.uk
Shayna Keyles has been keeping the world informed on the latest in law and litigation financing with RD Legal Funding, LLC since 2012. She offers writing and content marketing tips at her website, www.contentliaison.com, and tweets at @SKLiaison.