“I have a good client who needs pre-settlement funding, which I almost always advise against. But she is desperate, and this case will settle soon. Do you think you can help?”
As the executive director of The Milestone Foundation – the only nonprofit providing pre-settlement funding – this question, or a variation thereof, lands in my inbox several times a week. Non-recourse, pre-settlement funding companies market themselves as quick cash options for plaintiffs who are awaiting their settlements. It’s an easy lure for an individual who has undergone a catastrophic incident. Their injury has likely left them unable to work or facing mounting medical bills; their settlement will be a welcome reprieve, but in the meantime, they might not be able to afford groceries or rent.
Pre-settlement funding, also referred to as litigation finance, has grown exponentially in the past decade and is now estimated to be a nine-figure industry. In many cases, this funding is a necessary lifeline for plaintiffs looking to stay afloat financially while they are awaiting trial or settlement. Yet, there are few regulations attached to this type of funding, so much so that it’s often referred to as the “Wild West” of the lending industry. Opaque contracts, confusing terms, hidden fees, and complicated interest calculations are common features of these advances.
When an individual is desperate to make ends meet, terms like “compounding interest,” “quarterly fees,” and “capped at three times the principal” fade into the background, as “cash in less than 24 hours,” “no credit checks,” and “if you don’t win your case, you don’t owe anything” catch their attention and provide a glimmer of hope.
As many attorneys can attest, once a case settles and the payment is due to the lender, this lack of transparency often renders plaintiffs shocked to see that they now owe as much as $30,000 on the $10,000 advance they received. Plaintiffs can feel duped or betrayed, and oftentimes look to their attorneys to negotiate “haircuts” with the lenders or get them to waive their own fees – just to lessen the overall financial burden. “I had a client who recently received a $50,000 settlement,” an attorney practicing in New Mexico told me. “She owes $16,000 on a $5,000 advance she took out and is panicking at how little money she’s actually going to receive. I think I am going to have to waive my fees on the case just to help her stay afloat.”
It’s no wonder so many attorneys discourage their clients from taking these advances, though for many individuals these funds are more critical now than ever. Plaintiffs have long been at a disadvantage when pursuing justice against deep-pocketed corporations who can drag out litigation for as long as it takes. What’s worse is that the Covid pandemic has resulted in overloaded dockets and delayed court dates for civil cases. Meanwhile, as government programs such as stimulus checks and eviction moratoriums expire, inflation skyrockets, and savings dwindle, most Americans are barely making ends meet. At the end of 2021, 61 percent of the U.S. population was living paycheck to paycheck, down slightly from a high of 65 percent in 2020, according to a LendingClub report. Much to the chagrin of many experienced attorneys, these contrary factors – lengthened trial timelines and increased financial need – make non-recourse funding a necessary component of the civil litigation landscape. Given the oftentimes usurious nature of non-recourse advances, many states have introduced legislation or enacted regulations to rein in the industry. In Colorado, for instance, some courts have voided or re-written individual litigation financing agreements as traditional loans that are subject to low interest rate ceilings. While this helps plaintiffs avoid unfair and predatory rates, it also discourages many funders from assuming the risk that is inherent in non-recourse funding, leaving few options for these injured parties, who will then pressure their attorneys to settle their lawsuits – often to the detriment of their awards. Trade organizations such as The Alliance for Responsible Consumer Legal Funding (ARC) and American Legal Finance Association (AFLA) often lobby state legislatures to prevent restrictions on the litigation finance industry. They argue that the non-recourse nature of the lending requires their members to assume a high level of risk that justifies their practices, as plaintiffs are only required to repay these advances using the proceeds of the lawsuit; in the instance of an unfavorable result, the lender will not recoup their advance. ARC states that they support legislation that “enacts robust consumer legal protection for consumer legal funding, and maintains consumer access, because good legislation does both.” Both ARC and AFLA champion “industry best practices” and sponsor legislation to reflect these practices. ARC’s best practices range from recommending that contracts reflect all costs and fees – showing how much the consumer will owe every six months and the maximum amount a provider may ever own for a recovery – to prohibiting attorneys from receiving referral fees or commissions from the companies their clients receive their funding from. To date, six states have enacted ARC-backed legislation, while other bills are being reviewed in states like Kansas and Rhode Island.
While ARC and AFLA are adding regulatory measures to the industry, some might argue that they are not going as far as necessary to truly benefit plaintiffs who are utilizing this funding. While maximum payments and fees are listed in contracts, they are generally not easily found on websites, making it difficult for plaintiffs to comparison shop or to fully understand what they will owe until they go through the onerous application and underwriting process. Additionally, these trade organizations do not make recommendations on interest rates or maximum repayment amounts, which enables their members to continue to charge exorbitant rates and fees.
That’s not to say there are no ethical lenders in the space. Some companies are instituting policies such as capping repayment amounts at two times the principal, offering advances with simple interest that is applied every six months, offering help identifying government support and programs, and introducing innovations such as providing funds through debit cards that enable borrowers to pay for basic necessities in an effort to help them avoid the need to come back for an additional advance. Another viable alternative is The Milestone Foundation, formerly known as the Bairs Foundation, which was created six years ago to provide a plaintiff-focused alternative in the pre-litigation space. The Milestone Foundation is the only nonprofit providing low, simple interest pre-settlement advances. To date, the foundation has helped over 600 plaintiffs by advancing over $4.2 million and is looking to expand the reach of the clients it serves across the country.
Steven Shapiro, partner at Ogborn Mihm LLP in Colorado, has seen firsthand the benefits, as well as the pitfalls, of pre-settlement funding. “My job as an attorney is to get my clients the award they deserve,” he said. “If they don’t have the resources to pay their rent or buy their groceries, they are going to feel pressured to settle, and I won’t have the time I need to bring the case to a fair resolution.”
Shapiro has at times seen clients with no alternative but to take out advances with 30 to 40 percent interest rates; while painful at the time, these clients were able to see their cases through to a reasonable conclusion.
He has also seen The Milestone Foundation at work. He recounts his client, a Russian-American woman disabled in a car accident who needed funding. He referred her to The Milestone Foundation, the only nonprofit in the pre-settlement funding space, who was able to provide her with a monthly advance at a simple, low interest rate.
“The foundation was able to provide a reasonable advance at a reasonable rate, that enabled her to afford her living expenses for the duration of the case, which took about two years to settle and resulted in a seven-figure award. The contract was transparent and really the most wonderful thing. I would always opt to refer my clients to The Milestone Foundation rather than other lenders whose practices tend to be much more opaque.”