Do I Have to Pay Back Litigation Funding If I Lose My Case?

Key Takeaways

• If you lose your case, you will not be expected to pay back a lawsuit loan.
• Lawsuit loans are “non-recourse loans,” meaning you won’t be held personally financially responsible if you lose your case, and the lawsuit lender will not be able to collect your other assets.
• The lawsuit loan company determines how much to lend based on the size of the settlement they predict you’ll receive (so the loan is akin to a cash advance on your compensation).
• Lawsuit loans do come with some risks, like high interest rates and lack of federal regulation. This means it’s crucial to shop for a lawsuit lender carefully.

Do I Have to Pay Back a Lawsuit Loan If I Lose My Case?

Many people wonder if they’ll be expected to pay back third-party litigation funding should their attorney lose their case. 

When you’re already in a stressful situation and may be struggling financially, the risk of needing to pay back a loan can be daunting. Luckily, lawsuit loans work differently than traditional loans. If you lose your case, you will not be expected to pay back the litigation funding.

Pre-settlement funding is a form of “non-recourse funding,” meaning that you’re not expected to pay back the amount that you borrowed should you lose your case. In fact, lawsuit loans are not quite “loans” at all, but more like cash advances towards your future settlement or damages payment. 

When you apply for litigation funding with the help of your attorney, the lawsuit funding company will determine how much you might receive from a settlement or court judgment and offer an advance accordingly. 

You’ll receive the money quickly, with the expectation that it will be paid back out of a future settlement when you win (but with no expectation if you lose).

What’s a Non-Recourse Loan?

A non-recourse loan is a type of loan through which, in case of default, the lender can seize the borrower’s collateral, but may not go after their other assets (as opposed to a recourse loan, through which the lender may collect the borrower’s other assets as well). 

This means that most non-recourse loans have high interest rates and are typically only available to those with impeccable credit scores. Since borrowers are not held personally responsible, non-recourse loans pose a higher risk to lenders, which is why many banks don’t offer them.

Lawsuit loans are non-recourse loans because your potential future compensation serves as the collateral. The lawsuit funding company you choose will evaluate your situation carefully to determine how much you may be compensated, and offer a loan accordingly with the expectation that they’ll receive some of your future settlement should you win your case. 

In these situations, the client is put first and not held personally financially responsible should they lose the case. For a lawsuit loan, there is no need for a credit check or proof of employment (which can be a godsend if you are in a tough situation as a result of your lawsuit).

How Does a Lawsuit Loan Company Determine How Much to Lend?

Lawsuit loan companies determine how much to lend by carefully assessing your case and predicting how much compensation you may receive. The subsequent funding process is meant to act as a sort of cash advance on that compensation to be paid back should you win your case. 

Litigation funders’ teams typically work directly with your attorney to access your case and evaluate its merit. They’ll determine how much of your case’s value they predict you’ll receive and offer you a loan accordingly.

What Are the Risks of Litigation Funding?

Lawsuit loans may seem miraculous to some, but they are not without their risks. For instance, litigation finance tends to be expensive and come with high interest rates. 

If your case takes a long time to come to trial (as many personal injury cases, the cases most commonly associated with lawsuit loans, do), you’ll end up handing over a hefty portion of your settlement (or worse, owe more than you borrowed in interest and attorney fees). 

Moreover, lawsuit lenders are often picky with the cases they accept (since they’re taking a risk by offering you a non-recourse loan). This means you may need to apply to multiple companies before you find one confident enough to accept your case. 

Additionally, since lawsuit loans are not technically traditional loans, they’re usually unregulated by the federal government. This means there are less interest rate limits and requirements for disclosing the terms of the loan upfront.

If your case is liable to take a long time to settle (i.e., it’s a personal injury case), acquiring a lawsuit loan may be risky for you. 

Shop carefully for a lawsuit lending company—some offer a flat fee as opposed to high interest rates, are willing to disclose the funding agreement terms to you and your attorney, and follow best practices as outlined by the Alliance for Responsible Consumer Legal Funding. 

Make sure you choose a lawsuit loan company that won’t run a credit check in order to preserve your credit score.