Structured Settlement Loans

If you have a structured settlement, you may face a need for a large amount of cash ahead of what you expect to receive in your settlement payment schedule. Some people seek to use their structured settlements as collateral for a loan. This is not an option.

Some people inaccurately use the term “structured settlement loan” when they are actually talking about a different transaction: You can sell future structured settlement payments to a company that purchases them.

If you file a lawsuit and the opposing side agrees to settle, you may receive a lump sum or a structured settlement. With a lump-sum settlement, you receive all your money at once, concluding the case. With a structured settlement, you receive a series of payments, typically stretching out over years.

writing tasks on paper
The payments are intended to support your daily needs over time.

Sometimes, people with structured settlements find themselves in need of an infusion of a greater amount of cash than the immediate settlement payments will provide. They may want an advance on their future payments.

There are a few different approaches you may consider. The words used to describe these transactions are often misused. The law makes some options unavailable. And others can be expensive.

Can I Use My Settlement as Collateral for a Loan?

No. When you use property as collateral for a loan, you are allowing the lender to seize the property to satisfy your obligation if you fail to repay the loan. With structured settlements, that’s not an option. In short, you may not use a structured settlement as collateral for a loan.

That’s partly because if a bank found the need to seize the structured settlement payments if the loan wasn’t repaid, the bank would require court approval. Banks generally have no desire to participate in that process.

In addition, because of their favorable tax treatment, structured settlements may not legally be used as collateral for loans.

Can I Use My Settlement to Get a Loan?

Possibly. Even though your structured settlement can’t be used as collateral, you may use it to show you have income to repay a loan. So if you needed to get a mortgage, for example, you may get documentation from your structured settlement administrator to show the income you will be receiving from your structured settlement. You could also show bank statements where your structured settlement payments are deposited.

Documenting this income could be a way to prove to the mortgage lender that you will be able to make your mortgage payments. So in this sense, your structured settlement could help you get a loan.

Selling Structured Settlements

If you have a structured settlement and need a larger amount of cash, the primary option you have is to sell your future structured settlement payments. Some companies inaccurately call these transactions structured settlement loans. But they are not really loans.

If you decide you might want to pursue this option, you may search for a company that buys structured settlements. You may contact the companies, which will want information about your settlement. The company will make you an offer to pay you a reduced rate for your future payments. As part of the process, the company will need to obtain court approval.

Learn more about selling your settlement payments

Lawsuit Loans, Pre-Settlement Funding Controversial

Before you’ve settled your case, you may find yourself in need of money to pay bills. In that case, some people seek lawsuit loans, also known as pre-settlement funding.

There are several names for this type of loan, including lawsuit advance, third-party consumer litigation financing, pre-settlement loans, non-recourse advances and alternative litigation financing.

Empty courtroom with scale on table.
These loans are controversial, and the laws in each state differ.

The states and advocates don’t even agree whether to call these transactions loans or advances. This has implications about whether there are legal limits on interest rates.

How These Transactions Work

In general, companies that offer these products want documentation about your legal case. If they are confident you have a good chance of winning, they may advance money against your award or settlement. If you win, you repay the advance, plus interest, from your award. If you lose, you owe nothing.

Beware of Excessive Interest, Fees

The interest and fees on these loans or advances can be excessive. A Cornell Law Review study in April 2018 found that the companies that fund them “used various types of interest compounding, minimum interest periods, interest buckets and fees to add costs to the contract.” It’s best to proceed with caution when pursuing this type of funding.

6 Cited Research Articles

  1. Grayson, L. (n.d.). How to Obtain a Home Mortgage With a Structured Settlement as a Proof of Income. Retrieved from https://budgeting.thenest.com/obtain-home-mortgage-structured-settlement-proof-income-22165.html
  2. Fisher, D. (2018, March 19). Study on consumer lawsuit loans finds high rates, confusing terms. Retrieved from  https://legalnewsline.com/stories/511365351-study-on-consumer-lawsuit-loans-finds-high-rates-confusing-terms
  3. Leary, E. (2017, December 15). Unregulated lawsuit loans are a costly way to raise holiday cash. Retrieved from  https://www.cnbc.com/2017/12/14/unregulated-lawsuit-loans-are-a-costly-way-to-raise-holiday-cash.html
  4. National Association of Settlement Purchasers. (n.d.). FAQs About Secondary Market Transfers. Retrieved from https://nasp-usa.com/settlement-transfers/secondary-market-faq/
  5. National Structured Settlements Trade Association. (n.d.). Injured People. Retrieved from https://nssta.com/who-we-help/claimants
  6. Avraham, R. and Sebok, A.J. (2018, April 10). An Empirical Investigation of Third Party Consumer Litigation Funding. Retrieved from  https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3137247
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