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Lawsuit funding advances: friend or foe?

Reporter was commissioned to write this in-depth article

Court fees Legal funding advances are controversial for a number of reasons, but supporters say they're providing a much-needed service.

Many plaintiffs awaiting resolution of their lawsuit or legal claim often find themselves in a tricky financial situation. Personal injury victims are often unable to work following their accidents due to their injuries. In the interim, paying the mortgage and affording day-to-day expenses can prove an impossible task.

Enter legal funding, also known as third-party legal financing.This emerging industry has boomed in recent years. Why wait for the cash from your settlement when a lender will loan it to you right now? For some, it can be a lifesaver. But the industry on a whole is under scrutiny from insurance companies and lawmakers alike that claim lenders take advantage of vulnerable people who have no other place to turn.


When compared to traditional loans, lawsuit loans or pre-settlement advances (more accurately referred to as non-recourse cash advances) are loosely regulated, depending on the state. The criticism mainly surrounds the high interest rates that are charged. In many states, lawsuit lending is not subject to usury laws because it is not actually a “loan” in the traditional sense. A 2013 Fox Business report discusses how the industry is scrutinized (mostly by the insurance industry), and state legislation activity surrounding regulating the legal funding industry.

New legislation that just passed in Tennessee once again has all eyes on the industry. The bill, which took effect on July 1, makes it difficult for legal lenders to operate in the state. As a result, larger companies are pulling out of business in Tennessee.

According to anInsurance Journal report, the bill (known as the Tennessee Litigation Financing Consumer Protection Act) introduces costly operating fees for legal funding companies. It also regulates the fees that firms are allowed to charge consumers. In turn, many legal funding companies are now finding it too risky to operate in Tennessee.

"This new legislation will hurt a vast number of plaintiffs that utilize this money in order to pay for their day-to-day expenses,” said Bob Tansey, sales director at Pegasus Legal Funding.“Where will these plaintiffs turn to when they are being evicted, or need to provide for their children?”

These circumstances are just a few of the real-life situations that Pegasus says adversely affect litigants.

While some claim that lending companies interfere with the litigation process and force plaintiffs to hold out for larger settlements, lenders say this couldn’t befurtherfrom the truth. In fact, some experts saythat third-party litigation funding protects plaintiffs from settling prematurely because they’re strapped for cash.

“[Insurance companies] claim that we’re driving up the cost of litigation and increasing the demand for higher settlements, when in reality, we’re not doing that at all,” saidTansey.

According toTansey, Pegasus and other companies like it are hands-off when it comes to the legal case. They have no involvement whatsoever in individual cases.

“What we’re doing is enabling people to stay in the legal game long enough to get paid what they deserve,” he said. “We consider the money we provide an investment, not a loan. With every investment there is risk and the fact is we don’t get paid back on every case.”

In fact, under the terms of the advance, lending companies do not require plaintiffs to repay the advance unless they win their case. A University of Texas School of Law paper supports several of the legal funding industry’s claims that these advances may increase access to justice by allowing plaintiffs to avoid being pressured to accept substandard settlement offers.

Despite the inherent risk in the business, thoseopposedto third-party legal lending say that the risk is minimal and have cried out for the initiation of tighter consumer protection laws and regulation. New York, Colorado, and Maryland are among the few states that have moved toward regulating the industry, according to a recent report inThe Advertiser.

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