When a party suffers a personal injury on account of an act of negligence or careless neglect on another other party's part, usually the injured party opts for a personal injury lawsuit against the defendant party. In some cases, the lawsuit will be followed by a quick settlement, but most of the litigation takes many months or, in some cases it is years before a settlement is reached or a verdict is obtained. In all this time, the cost of litigation is substantial, and the plaintiff must bear personal expenses as well. The question then arises as to how these lawsuits are funded.

Lawsuit funding or pre-settlement lawsuit funding is a way to offset the costs of the lawsuit; a pre-settlement loan is offered to the plaintiff as a non-recourse cash advance. This type of funding is done with an assurance from the plaintiff that the advance will be paid back at the conclusion of the litigation. This type of loan also covers the plaintiff's personal expenses in situations where the plaintiff is severely injured or is indebted by heavy medical bills. In non-recourse finding, usually the plaintiff is not liable to pay back the advance if the lawsuit is unsuccessful. The lawsuit funding or financing company recovers the money only if the litigation is successful. The lawsuit funding party can be a financing company or the plaintiff's lawyer or the law firm.

As the fees associated with the pre-settlement funding are quite high, most of states in the United States have laws against charging of excessive rates for funding. As per Michigan law, in a contingency plan the plaintiff must pay the lawyer only after he has been reimbursed by settlement funds. Usually the recovery itself covers a lawyer's entire fee. Recently, a Michigan court held invalid a lawsuit-funding contract where the defendant's liability had been established, and it was ensured that the plaintiff would recover some amount of money as a result of the litigation. The court stated that the financing was, in fact, a loan, and the plaintiff was only supposed to repay the principal amount to the financing company.

Due to very high interest rates, pre-settlement lawsuit funding should be treated as a final option in adverse circumstances where the plaintiff has immediate financial needs. In such circumstances, where the plaintiff has no choice but to opt for funding, the decision should certainly be taken in consultation with counsel.