The legal funding industry has always been under a certain level of scrutiny.
As people try to draw comparisons between non-recourse legal funding and other sources of more traditional lending, or even other hot topic financial services like payday lending, the differences become quite clear.
Here is the biggest one:
When plaintiffs do not win their cases, they do not have to pay their legal funding advances back.
But that’s just the beginning.
Defining What Legal Funding Is, And Is Not
Critics of consumer financial services, like payday lending, believe they create “debt treadmills,” where recipients are not able to repay what is originally advanced to them, causing them to continuously roll their obligation over into new advances with never-ending payments and increasing fees.
And we agree.
In general, these less traditional, less regulated consumer financial services and the products they offer are targeting people who need the money. For most, it is the only way to pay for the basics, like rent, heat, hot water and food.
Contrary to this, the very foundation of legal funding is a contingent one. Meaning, the timeline is indefinite, and repayment may in fact never occur. The contingency of repayment owed back to the funding company is bound by the amount of the settlement, or judgment, received by the plaintiff.
Here’s the other thing: The plaintiff never pays, the defendant does.
This is the primary difference between legal funding and payday lenders and loans given out by banks and other financially-regulated institutions:
If a borrower cannot work, the lender is still entitled to repayment. In the case of legal funding, if the lawsuit fails – for any reason – the recipient is not required to repay the funding company.
Non-recourse legal funding is also not regulated by the federal government, and because most states have yet to put any guidelines in place to protect consumers, companies in this industry go largely unregulated.
As a potential consumer and future plaintiff, it can be tough to know which companies can be trusted, and which cannot be.
At Cherokee Funding, we strive for the most money possible for plaintiffs at settlement. We do this by advancing as little as possible and only pay the necessities – regular, reoccurring bills, like rent, electricity and the cost of food, and provide coverage for necessary medical expenses for those who are uninsured or underinsured. For cases that are drawn out, this is often best done through rolling contracts where plaintiffs receive a smaller amount of money each month, thus saving them money over the long run. Sometimes this makes us unpopular, but we also know it is in the best interest of the people we are advancing funds to.
Why Companies Get into The Legal Funding Business
For all intents and purposes, legal funding companies are investors.
As a plaintiff, your case is an investment decision, but the amount advanced is only indirectly related to you.
That’s because the investors, or the legal funding companies, do not expect to receive the investment funds back. Instead – like a traditional investment opportunity – the investor anticipates that the recipient will use the funds to generate profit from some other source. In the case of legal funding, that other source is the lawsuit, award or potential settlement.
If the recipient who has been invested in is not successful in generating a profit, the source providing the funds does not receive anything in return for the advancement they have given.
It is risky, and the return on investment is dependent on a myriad of outside, uncontrollable factors. The primary uncontrollable factors in legal funding being the insurance company, the jury and the judge. The decision, as ruled in court, cannot be bought or influenced and it directly correlates to how much, if anything, a plaintiff will receive at settlement. By association, this decision directly determines how much, if anything, will be paid back to the funding company.
Like some investors, legal funding companies obtain a promise of monetary repayment in return for their contribution, if and only if the plaintiff and attorney are successful. Even in the case where they are successful, this does not always result in the total repayment of funds advanced, making the very nature of it is still a contingent one.
Legal funding, like investments, has no initial obligation to repay. The potential obligation to repay exists, but only given the outcome of a future, unbiased decision made in court or by an insurance company and agreed to by your and your attorney. In both instances of legal funding and investing, there is an inherent risk of non-repayment.
In summary, the two primary factors that distinguish loans from legal funding, are:
- The contingent nature of the recipient’s obligation to repay
- The nature of the risk of non-repayment
It is true that some traditional loans are not repaid, but the legal obligation to repay comes as soon as the loan is accepted by both the lender and the recipient. In addition, loans that are not repaid have long-term negative credit effects on the borrower.
The same cannot be said for legal funding.
In short, the risk of loan default is a personal one, made wholly on the part of the borrower, while the risk of no return on legal funding stems as a result of legal decision making, and carries none of the same weight for the plaintiff.