Why Consumer Legal Funding Should Be Exempt from the “Tackling Predatory Litigation Funding Act”
The recently introduced Tackling Predatory Litigation Funding Act seeks to amend the Internal Revenue Code to impose a new federal tax on income derived from “litigation financing agreements.” While the intent, to regulate and tax large-scale speculative investment in litigation, may be understandable, the bill’s definitions are overly broad and risk sweeping in an entirely different financial product: Consumer Legal Funding.
Consumer Legal Funding is not litigation financing. It is a consumer-level, non-recourse financial transaction designed to help individuals cover basic household needs while they await the resolution of a pending legal claim. Taxing it under this legislation would not only misclassify the product but also harm the very consumers the measure claims to protect.
1. Understanding the Purpose of the Tillis Bill
At its core, Senator Tillis’s bill would impose a tax equal to the highest individual income tax rate plus 3.8% on “qualified litigation proceeds” received by a “covered party.” The definition of a covered party includes any third-party entity, domestic or foreign, that provides financing for a civil action and receives a return linked to the proceeds of that action
The Tillas Tax Bill defines a “litigation financing agreement” as an arrangement in which a third party provides funds to a named party or law firm in exchange for a direct or collateralized interest in the proceeds of a civil action. In essence, it targets capital providers who invest in litigation as a financial asset, entities that may fund law firms, commercial plaintiffs, or portfolios of cases.
That description, however, does not accurately fit Consumer Legal Funding.
2. Consumer Legal Funding Is a Personal-Finance Product, Not a Litigation Investment
Consumer Legal Funding exists to meet individual financial needs, not to invest in lawsuits. When a consumer has been injured and is pursuing a legal claim, often against a large, well-funded insurer, they may be unable to work and face mounting expenses such as rent, groceries, medical costs, and utilities. Consumer Legal Funding provides non-recourse funds to help them maintain stability. If the consumer does not recover in their case, they owe nothing.
Unlike litigation finance firms, Consumer Legal Funding companies do not:
- Fund attorney fees, discovery costs, or expert witnesses;
- Influence litigation strategy or settlement decisions;
- Purchase stakes in law firms or aggregate portfolios of claims;
- Seek to profit from legal outcomes as an investment class.
The consumer, not the company, controls the litigation, the attorney, and all settlement decisions. The transaction’s purpose is humanitarian and financial, not speculative. In short, Consumer Legal Funding funds lives, not litigation.
3. The Statutory Definitions Do Not Fit Consumer Legal Funding
The bill defines a “litigation financing agreement” as one that creates “a direct or collateralized interest in the proceeds of [a] civil action,” executed with “any attorney, co-counsel, or named party” to the case
While that might appear to include any transaction tied to case proceeds, Congress has repeatedly recognized the importance of context and intent in tax classification.
Consumer Legal Funding does not create a collateralized interest in the litigation itself. It is a purchase of a contingent right to a small portion of potential case proceeds. The funder has no lien on the case, no security interest in the litigation, and no claim against the defendant or the attorney. The consumer alone holds the legal claim.
4. Taxing Consumer Legal Funding Would Harm Consumers, Not Speculators
Applying this tax to Consumer Legal Funding would not affect hedge funds or foreign investment pools; it would directly impact injured consumers. A tax on Consumer Legal Funding companies would force higher transaction costs, reduce available funding, and make it harder for consumers to access help during times of financial crisis.
For example:
- A person injured in an accident may need $3,000 to avoid eviction while awaiting a settlement offer that could take months.
- If the funding company must pay an additional federal tax on its limited return, it will either raise costs or withdraw from certain markets entirely.
- The net result: consumers are left with no safe, regulated option and may turn instead to payday lenders or credit-card debt.
The bill’s sponsors claim to target “predatory litigation funding,” but in reality, taxing Consumer Legal Funding would punish consumers for being poor and discourage access to justice.
5. The Bill’s Structure Shows It Was Aimed at Institutional Investment, Not Consumer Funding
Several features of the bill make clear that it was drafted with large-scale litigation finance in mind:
- Entity-level taxation: Section 5000E-1(c) applies the tax at the entity level for pass-through entities such as partnerships or S-corporations, structures typical of commercial investment funds, not consumer-funding companies.
- Anti-netting provisions: The bill forbids offsetting gains with losses, suggesting a concern about investors managing diversified litigation portfolios for profit. Consumer Legal Funding companies operate on a per-case basis, not as hedge-fund-style portfolios.
- Reference to sovereign wealth funds and swaps: The inclusion of foreign sovereign wealth funds and “options, futures, swaps, or similar contracts” clearly points to the commercial investment market, not the small consumer transaction space.
Consumer Legal Funding is the functional opposite of these arrangements. It operates in a retail consumer-finance environment, subject to state-level consumer protection laws, caps, and disclosures, not the high-finance environment this bill seeks to regulate.
6. State Legislative Exemptions Demonstrate Clear Distinction
Across the country, several states have enacted legislation or adopted rules that explicitly distinguish Consumer Legal Funding from broader litigation financing or third-party litigation investment products. These statutes and regulations make clear that the two concepts are not interchangeable.
Arizona: The Arizona Supreme Court amended Rule 8 of the Rules of Civil Procedure to carve out Consumer Legal Funding from its definition of litigation financing. This rule recognizes that these transactions are not investments in litigation, but consumer financial products designed to support individuals during pending claims.
Texas’s Supreme Court subcommittee considered including funding in its litigation-financing rule but declined, recognizing that Consumer Legal Funding serves a different purpose.
Kansas: Kansas enacted legislation defining “consumer litigation funding” as a separate, regulated financial product under the state’s consumer protection framework. The statute explicitly provides that such transactions do not constitute loans and are distinct from attorney funding or litigation investment agreements.
Colorado: Colorado’s consumer funding law regulates Consumer Legal Funding through licensing, disclosure, and fee transparency requirements, while clearly exempting it from classification as lending or as traditional litigation finance. This framework demonstrates that the state views these transactions as consumer financial assistance, not litigation investment.
Louisiana: Louisiana’s Revised Statutes (§9:4861 et seq.) likewise treat Consumer Legal Funding as a lawful, non-recourse consumer transaction, distinct from loans and from litigation financing arrangements. Louisiana’s approach reinforces the understanding that these transactions are between funders and consumers, not between investors and law firms.
Collectively, these states’ actions show a consistent national pattern: policymakers at the state level recognize that Consumer Legal Funding occupies its own category, distinct from commercial litigation finance. Any federal measure that fails to preserve this distinction risks disrupting an established and well-regulated consumer marketplace.
7. The Economic and Social Role of Consumer Legal Funding
Consumer Legal Funding is a market-based alternative to government aid or high-interest debt. It provides liquidity to consumers who otherwise face “forced settlements”, situations where plaintiffs accept lowball offers simply because they cannot afford to wait.
By stabilizing households during litigation, Consumer Legal Funding:
- Promotes fair settlements that reflect the true value of claims;
- Reduces reliance on social safety-net programs;
- Supports small businesses and local economies by keeping consumers solvent.
Taxing the industry as if it were speculative litigation finance would undermine these benefits and exacerbate inequality between large corporate defendants and individual plaintiffs.
8. Consumer Legal Funding Does Not Generate “Qualified Litigation Proceeds”
Under the bill, “qualified litigation proceeds” are defined as realized gains, net income, or profits derived from litigation financing agreements
Consumer Legal Funding companies receive contractual payments directly from consumers’ portion of a settlement, after attorneys’ fees and costs. The consumer, not the funder, is the legal owner of the claim.
In other words, the company’s return arises from the consumer’s contractual obligation. This is a critical legal distinction. The IRS has historically treated such non-recourse contingent-asset purchases as consumer-finance transactions, not income derived from litigation.
If the Treasury were to apply this tax to Consumer Legal Funding, it would represent a fundamental mischaracterization of the nature of the transaction and could open the door to taxing numerous unrelated consumer products tied to contingent events (for example, insurance recoveries, structured settlements, or medical lien receivables).
9. Exemption Language Would Align Federal Law with Legislative Intent
To preserve the bill’s intent, targeting large-scale speculative litigation investment, while avoiding harm to consumers, Congress should adopt a clear statutory exemption for Consumer Legal Funding. The exemption could mirror existing state definitions, for example:
“The term ‘litigation financing agreement’ shall not include any non-recourse transaction in which a consumer legal funding company purchases from a consumer a contingent right to receive an amount of the potential proceeds of a settlement, judgment, award, or verdict obtained in the consumer’s legal claim.”
Such language would ensure that consumer-level transactions remain outside the bill’s scope, while still capturing true commercial litigation financing arrangements.
10. Conclusion: Funding Lives, Not Litigation
The Tackling Predatory Litigation Funding Act reflects concerns about transparency and profit-seeking in large-scale litigation investment. However, Consumer Legal Funding is not part of that world. It is a consumer-protection tool that gives ordinary Americans breathing room while they seek justice against powerful insurers and corporations.
To treat it as taxable “litigation income” would not punish predatory financiers, it would punish injured consumers, accident victims, and struggling families who simply need help paying rent or buying groceries while their case proceeds.
Consumer Legal Funding is a lifeline, not a loophole. Congress should make that distinction clear by exempting Consumer Legal Funding from the tax provisions of the Tackling Predatory Litigation Funding Act.
As the Alliance for Responsible Consumer Legal Funding reminds policymakers:
Consumer Legal Funding, Funding Lives, Not Litigation.
