What is a Structured Settlement?
Structured settlements are financial agreements that result when a claimant resolves a personal injury or product liability tort claim by opting to receive periodic payments on an agreed upon schedule.
This is an alternative settlement to receiving a lump sum payment. Structured settlements have become more frequent in the last few decades due to a few key factors. Primarily, the insurance companies or other defendants in personal injury/product liability lawsuits prefer to settle cases with a structured settlement because they receive tax incentives under the Periodic Payment Settlement Tax Act of 1982. The tax benefits to settling a lawsuit with a structured settlement do not only extend to the companies making payments. Those who have been awarded a structured settlement also receive substantial tax benefits, such that the full amount of periodic payments are considered tax-free damages. The purpose of this legislation was to encourage lawsuits to be resolved with structured settlements, because they offer financial stability and a dedicated income stream for the plaintiffs in these cases. The other clear advantage to settling a lawsuit with a structured settlement is that the responsible party can obtain an annuity through a third party which will guarantee the settlement payments for a smaller sum than the total amount that will eventually be paid to the plaintiff. This difference between a lump sum of cash now and a guaranteed amount of money paid out over a specified amount of time results from the time value of money.
The time value of money is basically the fact that money in your hand today has more value than the same amount of money some years from now, or put more plainly, a bird in the hand is worth two in the bush.
For example, if someone is offered a structured settlement of $10,000 per year for 10 years, they will have $100,000 in 10 years. However, because of the time value of money, settling for an immediate lump sum payment will reduce the total cost to settle the claim. It is common practice for the defendant in a structured settlement case to either purchase an annuity from a life insurance company or to pass its payment obligation to a third party which is then “assigned” to and guarantees the periodic payment obligation.
Structured Settlements have been encouraged by the legal system.
Clearly, structured settlements have been encouraged by the federal government through their enactment of the Periodic Payment Settlement Tax Act of 1982. This legislation incentivized the settlement of relevant lawsuits for both the plaintiffs and defendants by offering tax breaks. The intention of legislators was to ensure that large lump sum settlements were not quickly spent, leaving the victim without an income. Often, these settlements arise from personal injury and liability cases that inhibit the plaintiff's ability to work, and therefore, it is problematic for them to lose their ability to produce an income and to no longer have money from their lawsuit.
Legislators have the plaintiffs' best interest in mind, but things change.
Even though this legislation has the best interest of the plaintiff in mind, often financial and personal situations change during the lengthy period of time that the structured settlement spans. It is not uncommon over the course of the 10 to 20 years that structured settlement payments are being received, that a lump sum of cash is necessary. This need can arise from several sources, such as unexpected medical expenses, the necessity for reliable transportation, or possibly the need for stable housing. Because unexpected life expenses can arise during this time, structured settlements can also be considered limiting. This downside of structured settlements results from the fact that these contracts are inflexible by their very nature. Structured settlement payments must be fixed, and they cannot be accelerated, deferred, increased, or decreased to suit the changing needs of the recipient.
Structured Settlement Factoring Transactions
Structured settlement factoring transactions are the sales of future structured settlement payments.
Based on the fact that it is common for people to have a need for larger sums of money, the sale of structured settlements has become a popular way for recipients to sell part or all of their structured settlement in exchange for a lump sum payment. Because the circumstances in one’s life may change and unanticipated needs may arise, the structured settlement that once provided financial security and a designated stream of income no longer meets the needs of the recipient. Structured settlement factoring transactions are a solution to the problem that is posed by the inflexibility of structured settlements.
In 2001, Congress passed H.R.2884 which created regulations for the structured settlement factoring transaction industry. This legislation was put in place to protect consumers that wanted to sell their structured settlement payments by requiring the purchaser to pay an exorbitant excise tax when assuming control over another’s structured settlement. Essentially, this created a large financial barrier which forced sellers of structured settlements to follow the legislation. This tax can be avoided if the sale of the structured settlement is approved by a state court order. To address this legislation, many states enacted statutes regulating structured settlement transfers in accord with this mandate. You can review your state’s mandate on our statutes page.
Although the particular provisions vary from state to state, generally the requirements that must be met are as follows:
Inform
The seller of the contract must be informed about the essential details of the transaction.
Give Notice
- All interested parties must receive notice of the transfer.
Get Advice
Receive notice to seek professional advice regarding the transaction
Get approved
Receive Court approval of the transaction.
The court’s approval of the transaction is generally based on whether they find the transaction to be in the best interest of the seller.
The best interest of the seller is generally a subjective ruling by the court that takes into account the overall circumstance of the seller. Factors that may contribute to this judgment are current means of support for one’s self and one’s dependants, as well as mental and physical capacity, and the need for future medical treatment. Some states also require the seller to disclose the purpose for their desire to seek a lump sum payment in exchange for their structured settlement. You can review examples of “best interest” affidavits in our transactions examples.
Advances on Existing Lawsuits
In some cases, plaintiffs can receive an advance on their existing lawsuit.
Millions of people are involved in personal injury lawsuits every year. Due to the slow pace of the legal system, these lawsuits can take months or even years to reach a conclusion. Unfortunately, the impact on an individual’s life can be felt immediately. For example, if you are injured in an accident and are unable to work, you may struggle to pay your bills because you have yet to receive any lump sum or structured settlement compensation for your injury.
Pre-settlement lawsuit funding allows individuals who are in financial need to obtain a lump sum advance against the proceeds from their lawsuit before it is completed. By offering support to meet these essential needs with a cash advance against your lawsuit, your attorneys can have more time available to obtain the best possible settlement for you. This can often make a big difference in terms of reaching the best possible outcome.
Not everyone qualifies for an advance from their pending lawsuit.
To find out if this option is available to you, you will need to call one of our representatives and discuss the specific details of your pending lawsuit. You may need to provide paperwork related to your claim in order to allow us to determine if your lawsuit is qualified for a cash advance. Obviously, we want to offer you financial support, but we must be comfortable that you will win your lawsuit before we can provide assistance against that claim.
Remember, we do not provide you with legal advice, and we are not attorneys.