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Litigation Finance: Is it a Good Investment?

Daniel Martin | October 25, 2022

Going to court can be expensive...

Summary: Litigation finance is when a third-party pays for court costs and fees in exchange for a share of the profit that is made from the lawsuit. When you can’t afford to fund your case, litigation financing has many benefits and only a few drawbacks. If you’re being sued for a debt, use SoloSuit to respond and win in court.

Litigation is costly. The process of being summoned to court for judgment alone can be expensive. More often than not, the defendant is forced to take a settlement just because they don’t have optimal representation.

In such cases, where the plaintiff or defendant isn’t able to sustain the litigation due to scarcity of capital, third-party financers come to the rescue. Financers who invest in the legal proceeding by siding mostly with the parties who have the potential to win are called litigation financiers.

Let’s discuss what litigation finance is and whether or not it’s a good investment for you.

What is litigation finance?

Litigation finance involves a third-party that pays for court costs and fees in exchange for a share of the profit that is made from the lawsuit.

So, litigation finance isn’t a loan, but rather works on the principle of contingency. If the claimant isn’t awarded any compensation, the financier doesn't get anything for pursuing the dispute.

However, if a claimant is awarded monetary compensation, the financier is awarded a fixed portion of money from it. To secure their investments, litigation financiers often indulge their in-house lawyers, resources, and finances to extract a favorable outcome from the dispute.

How does litigation financing work?

Imagine yourself being a small business stranded in a dispute with a large insurance company over a missing shipment. As a result, a dispute arises with the insurance provider over the shipment and you’re presented with an underwhelming settlement offer. If you don’t have the necessary finances to support long-stretch litigation, you’re forced to accept the offer without going to court.

However, if you have access to a litigation financing arrangement, the other party would know that the case can very well be fought in court, where they may need to expend more resources in addition to the settlements—making the offers more equitable and fair to you.

Sensitive details of the case, like the viability of the claims, financial due diligence, and anything else that’s shared with the financier, become subject to confidentiality and non-disclosure agreement. Ensure that you both sign the agreements before sharing your case away.

These are the benefits of litiations financing

Litigation financing comes with great merits. While the primary benefit of litigation financing is leveling the playing field, there are many others to consider. Litigation financing benefits include:

  • Non-recourse financing
  • Greater ability to focus on case details
  • Increased bargaining power
  • External assessment of claims
  • Access to high-quality law firm

Keep in mind that these advantages are absent in most low-resource self-financed claims. Below, we explain these benefits in detail.

Non-recourse financing

In a litigation financing setup, your financier is only paid if you win the case. In the event of you and your law firm losing the claim, neither are liable to pay the financier anything. Technically, this non-recourse opportunity makes litigation financing more beneficial than taking a traditional loan.

However, this also makes it harder to secure the finances for your claims. If the litigation financier isn’t absolutely sure about you winning the case, they may not be interested in supporting your litigation with their money. Therefore, you’re obligated to share your case details with them to verify before they can proceed with your case, and you must be able to prove that you have a very strong case.

Greater ability to focus on case details

In many cases, even if you are well-resourced, you may not have the capital or risk appetite to handle the case by yourself. Litigation financing helps you in this regard. Being funded by a litigation financier means you can spend more time gathering proof with your lawyer than worrying about the financials of the case.

Increased bargaining power

With access to the extensive resources of a litigation finance provider, your case is bound to become much more critical to the opposing party than you trying to handle it all by yourself. In contrast to them trying to lowball you with an unconvincing settlement offer, they would be much more generous to you and won’t jeopardize their public image by losing the court battle.

Moreover, as your lawyer can proficiently analyze the case potential and the charges, you can get an optimal idea of how much your case is worth. They are also empowered to let you know if the case doesn’t have the merits to win.

External assessment of claims

It’s common to be so blinded by the wrongdoing of the other party that your judgment is clouded and doesn’t let you realize the lack of merit in the case. An external assessment of your litigation can help you clearly see the loopholes that you might have missed otherwise.

Typically, litigation financing organizations employ their partner law firms to any case they choose to fund. And since the financier and lawyer are in a symbiotic relationship, they both strive to help each other and you. Before financing your cause, they’ll carefully analyze the documents, proofs, and the claim to assess the case.

Litigation financiers are responsible for the expenses of the processing. But since you are only responsible for paying compensation if the opposing party wins the case, it’s better to have an experienced perspective on things.

Access to high-quality law firms

Litigation financing providers often partner with the best law firms expertised in specific domains of the law. Rather than tangling up with inexperienced lawyers, you can get access to the most proficient ones without spending a dime.

In most cases, as the law firms are partnered with the financiers, they spend their best resources on the case to secure their payment just as much as yours.

Litigation financing also has some drawbacks

Although nothing major, litigation financing has its own demerits that can make you reconsider your decision, including:

  • Mandatory disclosement of information
  • Regulatory restrictions

Now, let’s break down these disadvantages a little further.

Mandatory disclosement of information

As service providers, the litigation financiers are entitled to verify your case details before they can back you up. Therefore, you must submit every sensitive detail of your case with them. Although secured by non-disclosure agreement, if you aren’t comfortable sharing the details, you should reconsider using litigation financing as an option.

However, even if you pay for your case on your own, you’ll probably have to share the same details with your lawyer for optimal representation.

Regulatory restrictions

Most states require that you disclose information about your litigation financiers. It may not seem like a big deal, but it can affect the case as your opponent will have all the more reason to prepare for it better.

Increase your capital so you can fund your own case

If you’re worried about your capital, you may as well start building your property portfolio. Even if you don’t have a significant fortune to invest in expensive, high-end properties, you can start with short term rental investments that let you invest a significantly lower amount of $25,000 to capitalize on your interest in properties.

Short-term rental investment is pretty straightforward. You can start registering with a shared economy brand like Airbnb, VRBO, and HomeAway. Make sure you comply with all the regulations your state requires for such investments.

What if I am being sued in court?

As you know, being involved in a lawsuit is expensive and draining. If you’re being sued, it’s important to respond to the lawsuit as soon as possible to avoid a default judgment being entered against you. You have up to 35 days, depending on where you live, to respond to a debt lawsuit. If the opposing party gets a default judgment granted against you, they can garnish your wages and put liens on your property.

You’re probably wondering how to find a lawyer so quickly, but luckily, we have some good news for you. With SoloSuit, you can represent yourself and respond to a debt lawsuit in just 15 minutes.

Check out this video to learn more about how to respond to a lawsuit:

Key takeaways

Litigation financing is a non-recourse funding opportunity that helps you proceed with a case without worrying about the costs.

The benefits of litigation financing are increased bargaining power, risk-free proceeding, and external assessments. You also can access the best law firms with litigation financiers. The minor drawbacks of litigation financing are regulatory restrictions and information disclosement. Considering that litigation financiers would take up your case only if it merits a probable win, having the best legal counsel by your side to get you the compensation you deserve, is surely a huge positive.

If you don’t feel right about litigation financing, you can work to increase your own wealth and put yourself in a position to fund your own cases. Short term rental investments might be a good place for you to start.

When you get sued, the first step to fight back and win is to file a written Answer into the case.

SoloSuit can help you draft and file your Answer in all 50 states.

What is SoloSuit?

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You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.

SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.

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