What happens if a successful claim is against an insolvent defendant?

The claimant becomes one creditor among many. In a US bankruptcy, an unsecured judgment usually ranks as a general unsecured claim, behind secured creditors and the priority claims listed in 11 U.S.C. 507, such as administrative expenses and certain wages and taxes. It is paid only from what is left, often a fraction of face value and after years. Litigation against the debtor is also stayed once the bankruptcy is filed.

Do funders check the defendant's ability to pay?

Most do. Five of the seven commercial funders GAO interviewed said they considered 'the ability of the defending party to pay.' Burford's guide says monetary damages must be at stake, and its 10-K lists defendants' credit among the risks diligence may not foresee.

What about the law firm or insurer?

Each is a counterparty too. A law firm that fails can disrupt the case and its fee arrangements; an insurer that cannot pay leaves adverse costs uncovered. Burford's 10-K lists 'a law firm, an insurance company or another relevant party' among the parties whose insolvency 'could delay or prevent the litigation matter from being resolved.'

Does a settlement remove collection risk?

Mostly, but not entirely. Settlements paid over time leave the funder exposed to the payer until the last installment. Burford counts as concluded 'assets where the underlying litigation has been resolved and there is a promise to pay proceeds in the future (for example, in a settlement that is to be paid over time),' which means some concluded assets still carry credit risk.

How do funders protect themselves?

Through diligence on the defendant's assets and insurance, security interests over claims and proceeds, payment of proceeds into lawyers' trust or escrow accounts, judgment preservation insurance, and preferring defendants with insurance or strong balance sheets. Zerify's 2024 agreement routed all proceeds to outside counsel's account under an 'irrevocable pay proceeds agreement.'

Collection and Counterparty Solvency

Litigation Finance & Legal Claims

Definition

Collection and counterparty solvency risk is the risk that a party to a funded case, most often the defendant but also the claimant, the law firm or an insurer, cannot pay what it owes. Burford's 2025 Form 10-K says that before a case concludes it is exposed to the risk that 'a claimant who is our counterparty, a party against whom our counterparty is making a claim, a law firm, an insurance company or another relevant party will encounter financial difficulties or become insolvent.'

Why it matters

A claim's value is capped by the defendant's ability to pay, and a funded case has several other counterparties whose failure can also cut the recovery. Insolvency changes the question from 'did we win?' to 'where do we rank?', and an unsecured judgment usually ranks low. For an investor, counterparty credit is a risk that does not show in win rates: a fund can win most of its cases and still collect little from some of them. Ask how a fund assesses defendants' ability to pay, how proceeds are protected when they arrive, and how it is secured against the claimant's own creditors.

Common misconceptions

•Winning against an insolvent defendant is not collecting, because the judgment becomes an unsecured claim in a queue.
•The defendant is not the only credit risk, because the claimant, its law firm and its insurer can also fail.
•A concluded case is not always fully paid, because settlements paid over time carry the payer's credit risk until the end.
•Security over proceeds is not a formality, because without it the claimant's other creditors can compete for the money.
•A high win rate does not imply high collections, because a fund can win against defendants who cannot pay.

Technical details

Worked example (illustrative): winning against an insolvent defendant

Funder deployed $4.0 million; entitlement 3.0x, $12.0 million.

Judgment of $30.0 million; the defendant files for bankruptcy before paying.

The judgment ranks as a general unsecured claim; after secured and priority claims, unsecured creditors receive 15 cents on the dollar three years later.

Recovery: $4.5 million, all of which goes to the funder under its priority, 1.1x on $4.0 million over the extra three years.

The claimant receives nothing; if the funder had not been paid first, the shortfall would have been shared.

Counterparties in a funded case

Defendant: ability to pay, insurance, assets.

Claimant: its own solvency and secured lenders.

Law firm: continuity and handling of proceeds.

Insurers: ATE and judgment preservation policies.

Settlement payer: installments paid over time.

What AltStreet's reviews and filings show

Burford 2025 10-K: credit risk from the claimant, the defendant, law firms, insurers and others; concluded assets include settlements 'to be paid over time.'

Williams Industrial Services Group's 2022 10-K reports that a funded arbitration settled in 2022 for 'net proceeds of $8.1 million (after payment of attorney's fees and third-party funding costs),' which it used to prepay its term loan; the company and its subsidiaries filed Chapter 11 petitions in Delaware on July 22, 2023 (8-K of July 24, 2023).

GAO-23-105210: five of seven commercial funders considered the defendant's ability to pay.

Zerify 8-K EX-10.1 (August 2024): proceeds paid into outside counsel's account under an irrevocable pay proceeds agreement and distributed within ten business days.

Questions about counterparty solvency

Can the defendant pay a full judgment, and is it insured?

Does the funder hold security over the claim and proceeds, ahead of the claimant's lenders?

Where are proceeds paid, and who controls the account?

Are any settlements paid in installments, and how are they secured?

How strong are the insurers behind ATE or judgment preservation cover?

How investors apply the term

Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.

The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.

Frequently asked questions

What happens if a successful claim is against an insolvent defendant?: The claimant becomes one creditor among many. In a US bankruptcy, an unsecured judgment usually ranks as a general unsecured claim, behind secured creditors and the priority claims listed in 11 U.S.C. 507, such as administrative expenses and certain wages and taxes. It is paid only from what is left, often a fraction of face value and after years. Litigation against the debtor is also stayed once the bankruptcy is filed.
Do funders check the defendant's ability to pay?: Most do. Five of the seven commercial funders GAO interviewed said they considered 'the ability of the defending party to pay.' Burford's guide says monetary damages must be at stake, and its 10-K lists defendants' credit among the risks diligence may not foresee.
Why does the claimant's solvency matter?: Because the funder's entitlement is a claim on the claimant's proceeds. If the claimant becomes insolvent, its creditors and any secured lender may compete for those proceeds. Williams Industrial Services Group's funded arbitration settled in 2022 for 'net proceeds of $8.1 million (after payment of attorney's fees and third-party funding costs),' which went to prepay its term loan; the company filed for Chapter 11 on July 22, 2023. Funders take security over claims and proceeds to protect against exactly this.
What about the law firm or insurer?: Each is a counterparty too. A law firm that fails can disrupt the case and its fee arrangements; an insurer that cannot pay leaves adverse costs uncovered. Burford's 10-K lists 'a law firm, an insurance company or another relevant party' among the parties whose insolvency 'could delay or prevent the litigation matter from being resolved.'
Does a settlement remove collection risk?: Mostly, but not entirely. Settlements paid over time leave the funder exposed to the payer until the last installment. Burford counts as concluded 'assets where the underlying litigation has been resolved and there is a promise to pay proceeds in the future (for example, in a settlement that is to be paid over time),' which means some concluded assets still carry credit risk.
How do funders protect themselves?: Through diligence on the defendant's assets and insurance, security interests over claims and proceeds, payment of proceeds into lawyers' trust or escrow accounts, judgment preservation insurance, and preferring defendants with insurance or strong balance sheets. Zerify's 2024 agreement routed all proceeds to outside counsel's account under an 'irrevocable pay proceeds agreement.'