Litigation financing helps litigants to finance their litigation and other legal costs with the support of third party funding companies like – Baker street funding. Legal financing is similar to legal defense funds, and the legal financing companies provide money for lawsuits, helping those without strong financial background or resources.
Furthermore, legal financing is used mostly by plaintiffs, whereas legal defense funds are likely to be used by defendants. Money obtained from the legal financing companies are used multiple purposes, whether for personal matters or litigations. Whereas, the money from legal defense funds is used majorly to fund the legal costs.
The investment in the litigation is mostly provided as a loan on a “non-recourse” basis which indicates that if the case is lost at trial, nothing can be recovered by the third party investor. Therefore, with many investments, the investor stands to lose the entire investment.
Of course, in most of the cases settled and even if the case is not going as expected, a settlement may be achieved which does not completely provide all of the originally agreed return but will give a reduced one on the capital.
Legal financing companiesoffer nonrecourse cash advance to litigants in exchange for a percentage share of their settlement. Despite some superficial similarity to any unsecured loan from traditional lenders, legal financing operates completely different from other loans. Litigation funding is not considered as a loan, but rather as a form of venture capital or an asset purchase. Legal funding advances are not actually debts but are not reported to the credit bureaus, so the litigant’s credit ratings will not get affected with any litigant obtaining a legal financing advance.
Litigation funding is incredibly risky. Most of the funders providing non-recourse funding, which means that they lose their investment in case there are no recoveries from the underlying lawsuit.
The funders need to focus on several issues:
- a) The underlying lawsuit must have a higher chance of success, so to mitigate the chances of an unsuccessful outcome.
- b) The underlying lawsuit needs to have the potential for a higher recovery amount. Even if the lawsuit is successful, the recovery needs to be sufficiently high, otherwise, the recovery will not be sufficient to satisfy the investment amount.
- c) The funder must prioritize the recovery from the lawsuit. In case the funder is unable to gain seniority over theinvestors or lien-holders, then he/shemight be unsuccessful in recovering the fund from the lawsuit (even in case the other investors are successful). This is especially true in the personal injury space, as numerous medical lienshave seniority over the funder’s investment.
- d) The ability of the defendant to pay any judgment has been rendered. This can be achieved via an asset search on the defendant.
- e) The desire or ability of the plaintiff to payback the funder in the event of a successful recovery.
So, it is important to be cautious and aware of these associated risks, before applying for legal funding.