- Written By Lindsey Crossmier
StructuredSettlements.com Writer & Researcher
Lindsey Crossmier is a writer at StructuredSettlements.com with a specialization in financial education. Armed with a professional background in creative writing and an understanding of risk management and behavioral finance, Lindsey helps enable our readers to find long-term financial security.Read More
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Savannah Pittle is a highly accomplished writer and editor with a versatile background across diverse industries and a commitment to empowering our readers. She contributes her expertise to StructuredSettlements.com, educating readers about complex subjects like structured settlements to foster financial literacy.Read More
- Updated: June 19, 2023
- This page features 3 Cited Research Articles
Understanding Structured Settlement Loans and Cash Advances
What’s often thought of as a structured settlement loan is actually a structured settlement cash advance: a sum that a purchasing entity may extend to a structured settlement seller before the deal gains court approval.
Those needing immediate funds typically seek these cash advances. While structured settlements are a common way to compensate injured individuals, financial needs can sometimes exceed the payments received from these settlements.
Because selling or transferring your structured settlement payments is not quick, the seller is in a challenging position. Luckily for those facing this dilemma, many factoring companies provide structured settlement cash advances in specific situations.
Source: Independent Life
The Possibility of a Cash Advance
You may be eligible to receive a cash advance during the waiting period for the court approval of your structured settlement sale. The viability of obtaining a cash advance largely depends on the company buying your settlement payments and its specific criteria for granting cash advances.
For instance, the purchasing company may require:
- A thorough review of the structured settlement obligor and the annuity issuer
- Evidence of the settlement obligor and annuity issuer’s consent to the transfer
- Review of the Release and Settlement Agreement
- A copy of the complete annuity contract and benefits letter
- Verification of the seller’s state of residence
The purchasing company undertakes this review process to safeguard itself against providing cash advances to sellers whose payments may not be transferable due to an existing statute or prior court order.
The Cash Advance Amount You Can Expect
The amount you should expect from your cash advance depends on several factors relating to your specific settlement and the practices of the purchasing company.
Structured settlement buyers usually determine the amount of a cash advance based on the size of the settlement payments and the length of the payment schedule. Because the value of money decreases over time due to inflation and other factors, future payments are typically discounted to their present value using a discount rate, which can vary between settlement buyers.
The number of payments you’re selling and their due dates also play a significant role. For example, selling a larger number of payments or payments due sooner will generally result in a higher cash advance amount.
Are There Any Drawbacks to Accepting a Cash Advance?
While working with a reputable structured settlement factoring company means you won’t have to pay interest or fees as you would on a traditional loan, there are potential drawbacks to consider.
Firstly, it’s important to remember that the amount advanced will be subtracted from your final lump-sum payment when the transfer process is complete. But, as a non-recourse loan, you will not have to pay the advance back to the factoring company if the court denies the sale.
The decision to accept a cash advance will also affect the regular income stream you may have been relying on from your structured settlement. Once you sell your future payments for a cash advance, you stop receiving those payments.
Finally, each state has its own structured settlement protection acts governing the transfer of structured settlement payments, and all sales must comply with both federal and state laws. This is a complicated process that may delay the funds.
Always consult with a financial advisor or a structured settlement company for accurate estimations and advice.
3 Cited Research Articles
- Annuity.org. (2023, May 8). Structured Settlement Loans. Retrieved from https://www.annuity.org/selling-payments/settlement-loans/
- Cornell Law School Legal Information Institute. (2023). 26 U.S. Code § 5891 - Structured Settlement Factoring Transactions. Retrieved from https://www.law.cornell.edu/uscode/text/26/5891
- Internal Revenue Service. (2019, March). Excise Tax on Structured Settlement Factoring Transactions Audit Technique Guide. Retrieved from https://www.irs.gov/pub/irs-mssp/structured_settlement_factoring.pdf