Selling Payments

Structured settlements help a lot of injured people and their families by providing reliable income on which to live after a devastating accident. They protect people who can’t work and depend on the payments for income.

But sometimes, the settlement is more of a vault, keeping owners from gaining access to funds they need to cover an unexpected expense or pay debt. They may need to do major home repairs or pay a large medical bill. They may require a new car or have to pay to move. But no matter the emergency, they can’t tap directly into the account from which they are receiving their structured settlement payments.

They also can’t get a loan against their structured settlement. So the options are limited.

But people with structured settlements who need a large lump sum of money can sell all or some of their future structured settlement payments to companies called factoring companies on what’s known as the secondary market.

Deciding to Sell Your Payments

According to the National Association of Settlement Purchasers, most structured settlement holders never sell their payments. Less than 20 percent ever complete such a transaction.

For those who do, most don’t depend on the payments for all of their monthly income. But even people who depend on the payments may need to get a lump sum in exchange for rights to a portion of their future payments.

The vast majority of people who sell structured settlement payments sell only a portion of those payments.

For example, you might receive $5,000 a month, and decide to sell $1,000 of each payment for the next two years. Or you could decide to sell six months’ worth of payments.

Keep in mind that you will not receive the same amount of money selling the payments as you would receive if you had continued to receive the payments over time. That’s because the factoring company has legal and administrative expenses to cover. So the offer you receive will be discounted. In general, these transactions include discount rates of between 9 and 18 percent. Your rate depends on factors such as where you live, the length of your settlement and how much you want to sell.

You should research factoring companies to make sure you’re dealing with a reputable business. And you should talk to more than one company to compare offers and get a fair deal.

Decide how much money you need and sell enough payments to cover that amount only. It will be more difficult to get a second sale approved, so make sure you sell enough to avoid that being necessary.

Reasons for Selling

There are many reasons for wanting to sell structured settlement payments. Some of the most common reasons include the following:

• Purchasing a home
• Major house repairs
• Buying a car
• Educational expenses for you or a family member
• Paying off debt
• Starting a business
• Medical expenses
• Funeral or end of life expenses
• Unexpected moving expenses

The Selling Process

The sale of any of your structured settlement payments must be approved by a judge in your area. That’s because of laws established by Congress and the states designed to encourage structured settlements and protect people covered by them.

Congress views structured settlements as beneficial because they provide a way to take care of injured people without requiring government assistance. They are also viewed as compensation for injury, rather than income. For these reasons, most structured settlements are tax exempt.

Congress has also enacted laws to force secondary market payment sales to comply with state laws, including requiring court approval. This is to prevent settlement holders from being exploited by unscrupulous factoring companies.

A judge must review your sale and speak to you to determine if the sale is in your best interests.

To do so, the judge will ask a series of questions, such as:

• Do you understand the transfer agreement?
• Did you have an opportunity to review this transfer with a financial professional not connected to the structured settlement buying company?
• Do you understand that selling payments means you will receive a lump sum less than the total amount of future payments?
• Do you feel comfortable that you shopped around for the best deal?

The factoring company you choose will coordinate the paperwork and arrangements for court review. But you may be required to appear before the judge in your area.

Protect Yourself

You are your own best advocate, but it never hurts to get some help. If you are considering selling your structured settlement payments, seek the advice of someone you trust, a lawyer or a financial advisor.

Make sure you research the funding companies you’re dealing with. Check their websites and talk to their representatives. Check to see if they belong to any professional organizations, such as the National Association of Settlement Purchasers.

The Consumer Financial Protection Bureau recommends asking the following questions:

• What is the cancellation policy?
• Do you have to pay taxes?
• Will there be an impact on public benefits, such as Medicare?
• What are your rights under state law?
• Are there complaints against the company?

Be cautious regarding any companies that solicit you through vague direct mail letters, especially if the letters claim that your structured settlement might be in jeopardy and you need to sell quickly. Also be wary of companies that send you contracts before you have talked to them or have negotiated an agreement.

Don’t be pressured to do anything that you haven’t had time to research fully. And be skeptical of advertising claims.

Get quotes from more than one company so you can compare them. Ask about any fees you’ll be expected to pay, and the discount rate. Ask what it will cost you if the court denies approval of the transaction. Talk to the attorney who works for the company about the court process. Ask how long it should take and what you can learn about the judge and his or her priorities.

Make sure you have a copy of all the paperwork. Read the fine print. Make sure you fully understand the contract and all its provisions before signing anything.

If you owe past child support or have any tax liens against you, those debts will be paid first from the sale of your payments before you can use the funds.