What Risks Are Involved in Pre-Settlement Legal Funding?

The primary risk for plaintiffs is cost: if a case takes longer than expected or the advance is larger than necessary, the repayment amount can be significant. Understanding the rate structure and modeling multiple scenarios before signing is essential.

Pre-settlement funding eliminates the risk of personal liability for case loss — the non-recourse structure is the key consumer protection. But there are real financial risks that plaintiffs should understand before applying. The primary risk is cost: the longer a case takes, the more interest accrues, and the higher the repayment obligation at settlement. In very long cases (three to five years or more), funding costs can consume a significant portion of the net settlement.

Compound interest is a specific risk to watch for. Funders that use compound interest — interest charged on accumulated interest, not just on the original advance — can produce dramatically higher repayment obligations over long cases compared to simple interest funders. Always confirm the interest structure before signing: simple interest is the standard for reputable, ALFA-member funders.

Taking more than you need is a common mistake. Because pre-settlement advances accrue interest from the date of issuance, a larger advance costs more over time — even if the money sits in a bank account unused. Take only what you genuinely need to cover your current expenses and revisit whether additional funding is necessary as the case progresses.

Applying to multiple funders simultaneously without attorney coordination can create disclosure complications in some jurisdictions. Some courts require disclosure of third-party litigation funding, and having multiple agreements outstanding could complicate the case record. Your attorney should know about any funding you apply for or receive.

Source: ALFA Consumer Litigation Funding Code of Conduct. Risk disclosure standards vary by state — ensure your funding agreement includes clear rate and term disclosures as required.

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