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The American Legal Finance Association (ALFA) is a not-for-profit organization representing member companies who provide advance funds to plaintiffs with pending personal injury and commercial lawsuits. The capital provides support to these victims who face financial constraints - because their injuries may keep them out of work or their medical bills may steadily increase - and seek funds to handle daily expenses while they await full resolution of their cases.
Why can't plaintiffs seek financial assistance from banks through a traditional loan?
Pending lawsuits are not assets that banks recognize when determining an individual's qualification for a loan. This asset class (pending lawsuit) has an unknown outcome, an uncertain maturity date, and the applicant has no current means of repayment. In addition, the majority of advances ALFA provides are relatively small and banks might find it uneconomical to process a large volume of small transactions.
Why is advancing funds against a pending lawsuit not considered a loan?
Simply, advancing funds against a pending lawsuit requires no repayment if the plaintiff does not receive a cash settlement or award upon resolution of the lawsuit. Because all advances are made on a "non-recourse" basis, the investor forfeits their entire advance for that case if the plaintiff is not successful in their lawsuit. ALFA Members provide funding for individuals who cannot receive a loan, because they do not have the cash flow or collateral required to receive a loan.
Who is a typical ALFA client?
ALFA receives much of its business from attorney referrals. It is illegal in most states for attorneys representing personal injury victims in their lawsuits to provide any financial support to their clients. Instead, these attorneys may refer their clients to an ALFA member company when the client is experiencing financial distress during the course of his or her case.
To pay for medical bills, purchase food and keep their homes...
In these situations, plaintiffs may be out of work and/or have large medical bills to cover as a result of their injuries. As a result, money quickly becomes tight and victims find it difficult to pay bills, purchase food and basic supplies, or keep their homes. Usually, they will first turn to friends, credit cards, employers, or their community for financial assistance, but when these options are exhausted they find Legal Finance critically helpful and timely. This assistance gives them the means they need to keep their families and lives intact while they await a complete and fair resolution of their case.
How do ALFA member companies determine a client's eligibility for an advance?
Each ALFA member employs legal analysts or attorneys who review the pending case of each applicant by examining legal documents and speaking with the client's attorney. Only those plaintiffs with meritorious cases and a good likelihood of success become eligible for advance funding support.
Why do advances against cases have higher rates than traditional bank loan rates?
ALFA Members do not provide loans, and therefore traditional bank loan interest rates cannot apply to these funds. Lawsuits are risky investments and "non-recourse" advances are provided in situations where there is an unknown outcome, an uncertain maturity date, and the recipient has no current means for repaying the funds advanced to them. Furthermore, these advances do not require repayment of the investment or any fees if the plaintiff does not receive a financial award or settlement when the case is resolved. If the case is lost or the defendant insolvent, ALFA Members forfeit their entire investment in that case. The higher rates also reflect the high transaction costs associated with processing, origination and servicing small advances.
Why do Legal Finance companies charge high rates?
There is a great misconception about the rates ALFA Members charge. As we mentioned earlier, our clients come from an asset class with an unknown outcome, an uncertain maturity date, and no current ability to service the advance. Traditional banks not only do not understand it, they feel that they have no true collateral to make such an advance. ALFA members' own internal cost of funds, on average, is typically 15% per annum or greater. In addition, most companies have annual loss rates, which are usually a significant percentage of the amount funded. When you add overhead, wages, benefits and other general operating costs, you can see that on average, the true cost of doing business exceeds 30% per annum.
Do non-recourse advances violate usury laws?
No. By making an advance against a pending case (more formally known as "non-recourse" Legal Finance) based on the future value of a case that may or may not ultimately be settled, ALFA Members share the risk of recovery and/or loss together with the plaintiff and the attorney. In fact, courts throughout the United States have held that such "at risk" advances are not loans.
Can rates be lowered?
The market place has been an efficient regulator of rates over the past 5 years. In the past this asset class, with its uncertain outcome, unknown maturity, and no interim payments had created a market where companies charged 10 - 15% per month with other fees and minimum charges. The advent of competition and an organization such as ALFA, establishing and utilizing best practices, has brought these charges down substantially. The New York Attorney General guidelines that were endorsed by ALFA Members have increased consumer disclosure and awareness, helping to self-regulate fair rates and business practices throughout the industry.
As the industry continues to mature, ALFA expects rates will continue to fall with more institutionally financed companies entering the marketplace. In addition, it is hoped that the more knowledgeable the banking community becomes about non-recourse funding, the greater the probability that ALFA Members will be able to achieve overall lower costs of capital. Those costs savings will be passed along to the clients in the form of lower rates.
Will it make it harder to settle a case with a non-recourse advance in place?
No! In fact, a non-recourse advance often encourages the wrongdoer to settle for more money! Most companies fund less than 10% of the estimated net value of the case. They do this for a variety of reasons. One is the obvious risk that goes with the funding of a case. Another is so that the money is for life's necessities only and not for frivolous spending. The third reason is that funding only up to a maximum of 10% of the anticipated net value of the case assures that the investment does not interfere with the lawyer's ability to obtain a fair and just settlement. Too high an advance could disincentivize the client from settling the case, forcing unwarranted court resolutions.
ALFA Members have the role of providing their clients with the time to allow their attorneys to properly handle their cases. All members have embraced this 10% rule to allow attorneys the time to do just that. Members do not get in their way nor do they have any say in the strategy or the ultimate outcome of the cases.
Does the Legal Finance industry actually encourage litigation?
Not at all. In fact, quite the opposite is true. ALFA Members only fund a case after a claim has already started and the client has a lawyer, usually a number of months into litigation. ALFA Members help victims level the playing field against big insurance companies or governmental agencies that have the time and money to force - or strongly encourage - a settlement that is premature and therefore low. We help our clients achieve appropriate settlements by enabling their attorneys to have the time to do what needs to be done to resolve a case. Nothing more.
Does the Legal Finance industry promote frivolous litigation?
Not at all. The non-recourse Legal Finance industry does not promote frivolous litigation and actually discourages it. If an ALFA member encounters a frivolous case during their evaluation, they will not fund it. Besides being against public policy, frivolous cases also make very bad investments, since the overwhelming majority of them have low probability of success. By helping victims with compelling claims, ALFA Members actually discourage frivolous litigation by denying frivolous cases financial support. By facilitating a more direct, transparent and rational distribution of capital to plaintiffs, we enable a more balanced and efficient legal system, which is consistent with the realities and demands of a modern free market economy.
Does the industry take advantage of the less fortunate?
Quite the opposite. ALFA Members provide funding to plaintiffs who find themselves in very difficult financial situations. They have sustained an injury due to an accident beyond their control, and while awaiting resolution of their case and possible compensation for their injuries often find themselves financially strapped. Out of work and/or facing increased medical costs due to their injuries, clients suddenly find it difficult to make ends meet - to pay bills, keep their homes, and provide foot for their families.
If cases were quickly resolved, this time of financial difficulty might be short lived for these victims. Instead, personal injury claims can take on a average three years to resolve. This period of waiting can be most challenging, and might convince a plaintiff to take a settlement below what they or their attorney might feel they should receive, simply because the client and his or her family needs money to live. Legal Finance provides plaintiffs with the financial assistance to wait for a fair and complete resolution of their case.
Where well funded companies have the money and resources to work through the long process of resolving cases, individuals often do not. Advance funding levels the playing field for these victims, so they can see their cases to fair resolution.
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