Lawsuit funding is a third party advance of funds to a plaintiff, typically in a personal injury case, that is designed to be paid back out of the future settlement proceeds of a pending court case. This type of funding is provided without recourse. The plaintiff only has to return the money if he receives a settlement in the case. If the plaintiff loses the case, he does not have to pay the advance back.
A civil case can take years to wind its way through the court system to eventual judgment or settlement. During that time, the plaintiff might have expenses that need to be covered or have to make up lost income if he is out of work for an extended period of time. Lawsuit funding is a cash advance option for any litigant who has a viable civil case with a high likelihood of obtaining a monetary judgment or a settlement. Personal injury cases, are the most common types of cases where lawsuit funding is used, particularly in the U.S.
Companies that offer lawsuit funding charge either a flat or monthly compounding fee for the advance. This fee is typically very high and in order to avoid the laws against lenders charging excessively high interest rates, this sort of funding is never referred to as a loan. Lawsuit funding is sometimes called a cash advance, cash investment, or referred to as venture capital. The characteristic of the transaction that takes it out of the realm of strict lending is the possibility that the plaintiff will never have to give the money back.
Lawsuit funding is offered on a non-recourse basis, which means the plaintiff only has to pay the money back if he wins the case and receives money. The amount he has to pay back is also limited by the amount of the judgment or settlement. If the proceeds from the case are less than what is owed to the funding company, the company takes the loss. The advance of money is contingent on the success of the underlying case, so the transaction avoids the strict definition of a loan and the company avoids usury laws for charging excessively high fees that would be considered interest.
A lawsuit funding company typically makes an evaluation of the likely success of a case to minimize the risk of losing money by talking to the attorney on the case. Once convinced that a settlement or judgment in the case is likely, the company decides how much it is willing to advance. To finalize the transaction, the attorney on the case is asked to sign an agreement that he will reimburse the company for the advance out of the settlement proceeds before disbursing the balance to the client.