Lawsuits are time-consuming, stressful and expensive. Even if you have an attorney willing to work on a contingency contract, by which he or she will be paid only if the case succeeds, there are still many expenses that can arise. Attorneys generally do not front the costs for such ordinary operational costs as copying documents, printing evidence and postage. Furthermore, if expert testimony is needed from a doctor or engineer, those expenses come out of the client’s pocket, not from the attorney. Usually, expert witnesses require payment up front before agreeing to review documents, give a deposition or testify at trial.

Beyond the direct expenses involved in a lawsuit, there can be indirect costs. The person going to trial may be out of work or uninsured, and further burdened by mounting expenses. The disruption brought on by the circumstances that gave rise to the lawsuit might put a tremendous financial strain on the client’s family.

In the late 1990s, the practice of litigation funding began to affect the legal landscape. Companies began to offer plaintiffs (those who brought a lawsuit) and even lawyers funding for costs and other financial needs during a lawsuit. How does this process work, and what are the risks? Here are some facts about litigation funding that everyone involved should know.

1. Only certain kinds of plaintiffs and cases qualify Litigation funding generally is offered only to plaintiffs who are involved in contingency cases. Usually these kinds of cases include personal injury, medical malpractice and civil rights cases. Litigation funding companies assess cases before agreeing to fund them, choosing to do so only for matters with a strong likelihood of success. The party being sued must be able to pay if the plaintiff wins, so if the defendant is poor or likely to declare bankruptcy, funding usually will not be advanced.

2. The lawyer for the plaintiff must agree Because the funding company will be claiming a portion of any settlement or award, the plaintiff's lawyer must agree to litigation funding. This approval is necessary because the plaintiff’s lawyer has a separate agreement with the plaintiff for a percentage of any settlement or award, usually a figure between 25% and 33%, and the attorney’s payment might be affected by the repayment to the funding company.

3. The amount of funding is limited Plaintiffs obtaining litigation funding do not get access to an open account, but generally are paid one lump sum. Once the advanced money is used up, the plaintiff would not receive any further funds, unless a new funding agreement is reached. A second chance at funding is not likely unless there is a strong chance of a substantial award.

4. The money is not a loan Litigation funding companies do not make loans in the usual sense. Because the loans do not have to be repaid if the plaintiff loses the lawsuit, such funding generally is considered a nonrecourse debt. If the plaintiff is successful, the amount that is paid to the funding company is not tied to the amount advanced with interest, but is a set percentage of the settlement. This means that the funding company might recover only a portion of the advanced amount, or it could receive more than the amount provided to the plaintiff. Repayment schemes differ from company to company.

Litigation funding can carry risks, and it is possible that the plaintiff will end up with less money after a settlement or award than would have been available, without the financing. However, when a family is facing mounting costs during a lawsuit or is being considered for foreclosure or eviction, such an option might make sense. Remember, do not make any decisions without consulting your attorney and considering all the facts.

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