A structured settlement is a financial or insurance arrangement in which an individual agrees to resolve a personal injury tort claim by receiving part or all of a settlement in the form of periodic payments rather than as a lump sum. Such agreements often stem from cases like medical malpractice, wrongful death, or personal injury.
The Need to Sell a Structured Settlement
In certain circumstances, people may find themselves in need of larger sums of money due to unexpected life events, major purchases, or emergencies. As a result, the idea of selling a structured settlement to receive a lump sum instead of monthly or yearly payments can be appealing.
However, it’s essential to understand the costs involved in selling your structured settlement. The transaction isn’t as straightforward as it might seem, with multiple variables impacting the eventual outcome.
The Cost Factor
Factoring Discount Rates
When you decide to sell your structured settlement, you won’t receive the full amount. The company purchasing your settlement, commonly referred to as a factoring company, applies a discount rate, which can vary significantly from one company to another, generally ranging between 8% and 18%. This is essentially the “cost” or “fee” for the service of providing you with a lump sum now in exchange for your future payments.
Legal and Court Fees
Selling a structured settlement isn’t merely a transaction between you and a factoring company. It also involves legal processes and court approval to ensure that the sale is in your best interest. These procedures can lead to costs in the form of legal fees, notary fees, and potentially other court costs.
If a broker facilitates the sale of your structured settlement, they may charge a commission for their services. This commission can be either a fixed amount or a percentage of the sale price.
Calculating the Real Cost
Let’s illustrate this with an example: assume you have a structured settlement worth $100,000 over the next 10 years. A factoring company offers to buy your settlement for a lump sum, using a discount rate of 12%. The present value of your settlement is reduced to $88,000. If there are legal and court fees of $2000, and the broker charges a 1% commission ($880), you will ultimately receive $85,120. Hence, in this scenario, the cost of selling your structured settlement is $14,880, or nearly 15%.
Making an Informed Decision
Selling a structured settlement is a significant financial decision that requires careful thought and consideration. The “cost” of the sale can be substantial, reducing the amount of money you receive. Therefore, it’s essential to consult with a financial advisor and a lawyer to understand all the implications fully.
Also, consider other alternatives to selling your structured settlement, such as taking out a loan or finding other means to manage your current financial needs. The decision to sell should only be made after exploring all available options and considering your long-term financial health.
Frequently Asked Questions
Q1: How Does the Process of Selling a Structured Settlement Work?
Selling a structured settlement involves transferring your future payment rights to a factoring company in exchange for a lump sum payment. The process starts with getting a quote from the factoring company, which includes the discount rate and other associated fees. Once you accept the quote, a contract is drafted, and the transaction requires court approval. After court approval, you’ll receive the agreed-upon lump sum.
Q2: Can I Sell Only Part of My Structured Settlement?
Yes, you can choose to sell only a portion of your structured settlement. You might decide to sell a number of future payments or a percentage of each payment, retaining some of your structured settlement income. It allows you to access a lump sum now, while still ensuring some level of future financial stability.
Q3: Is the Money I Receive from Selling My Structured Settlement Taxed?
According to the federal tax code, the money received from selling your structured settlement is tax-free, as long as the settlement originated from a lawsuit involving personal physical injuries or physical sickness. However, if the structured settlement was for punitive damages or any other reason, the lump sum received may be taxable.
Q4: Can I Back Out After I Decide to Sell My Structured Settlement?
Once the court has approved the sale of your structured settlement, you generally cannot change your mind. That’s why it’s essential to be sure about your decision before moving forward with the sale. It’s advisable to consult a financial advisor or attorney before making such a significant financial decision.
Q5: How Long Does It Take to Sell a Structured Settlement?
The duration can vary, but it typically takes between 45 to 90 days to complete the entire process of selling a structured settlement. This timeline includes receiving a quote, agreeing to the terms, obtaining court approval, and receiving your lump sum payment.
Q6: How Do I Know If I’m Getting a Fair Deal?
Determining a fair deal involves understanding the current value of your future payments (the present value), the discount rate used, and comparing offers from various factoring companies. An understanding of the time value of money and a consultation with a financial advisor can be extremely beneficial in determining if you’re getting a fair deal.
Q7: Are There Alternatives to Selling My Structured Settlement?
Absolutely. If you need a lump sum but don’t want to sell your structured settlement, you could consider alternatives such as personal loans, home equity loans, or even crowdfunding depending on your situation. It’s essential to explore all your options and assess the potential long-term impacts before making a decision.
Q8: How Can I Choose the Best Factoring Company?
Selecting the right factoring company is crucial for a beneficial deal. Consider factors like their years in business, customer reviews, rates offered, and transparency in costs. Don’t hesitate to ask questions about their process, fees, and timeline. It’s also a good idea to check their standing with the Better Business Bureau or similar consumer protection agencies.
Q9: Why Does the Sale of My Structured Settlement Need Court Approval?
The court approval process is intended to protect the seller. It ensures that selling the structured settlement is in your best interest and that you are not being exploited. The judge will assess the fairness of the deal, your understanding of the terms, and the necessity of the sale.
Q10: Is Selling My Structured Settlement My Only Option If I Need Money Now?
No, selling your structured settlement is just one of many options. You could explore getting a personal loan, a home equity line of credit, or even pulling money from your retirement account, although these options also come with costs and should be considered carefully. In some cases, it may be better to adjust your budget or consult with a financial advisor to find other ways to meet your financial needs.
Q11: What Happens if the Factoring Company Goes Bankrupt After I Sell My Settlement?
If the factoring company goes bankrupt, your payments are generally safe because they are often transferred to an independent third party known as an annuity servicer before the factoring company receives them. This third party manages and distributes the payments to the factoring company or to you if you’ve only sold a portion of your payments.
Q12: Can I Negotiate the Terms of the Sale?
Absolutely! Just like with any other financial agreement, the terms of the sale of your structured settlement are negotiable. You can and should negotiate the discount rate, fees, and other costs to make sure you get the most out of your structured settlement.
Q13: Can the Sale of My Structured Settlement Affect My Benefits?
Yes, the sale of your structured settlement could potentially affect your eligibility for need-based government benefits, like Supplemental Security Income (SSI) or Medicaid. The lump sum could be counted as income or assets, potentially disqualifying you from these benefits. If you’re currently receiving these benefits, you should consult with an attorney before selling your structured settlement.
Q14: Can I Sell My Structured Settlement More Than Once?
Yes, you can engage in more than one structured settlement sale. However, each sale must go through the same legal process, including court approval, to ensure the transaction is in your best interest. Keep in mind that repeated sales could greatly deplete your future income stream.
Q15: What Happens if I Die Before Receiving All of My Structured Settlement Payments?
The continuation of your structured settlement payments after your death depends on the terms of your agreement. Some structured settlements include a guaranteed period where payments will continue to your designated beneficiary if you die. Others might cease upon death. It’s essential to understand these terms before selling your settlement.
Q16: Why Is the Lump Sum I Receive Less Than My Total Future Payments?
The lump sum you receive is less than your total future payments due to a concept called the time value of money, which states that money available today is worth more than the same amount in the future. Factoring companies also apply a discount rate to account for the risk and costs associated with waiting for future payments.
Q17: Can I Use the Lump Sum From Selling My Structured Settlement for Any Purpose?
Yes, once you sell your structured settlement and receive a lump sum, there are no restrictions on how you can use the funds. However, it’s important to use the money wisely, considering its potential long-term implications on your financial stability.
Q18: Does My Reason for Selling My Structured Settlement Affect the Court’s Decision?
Yes, the court will consider your reason for selling the structured settlement. They aim to ensure the sale is in your best interest and isn’t exploitative. If you’re selling to finance a non-essential luxury, the court might not approve the sale, whereas if you’re selling to cover medical bills or significant debt, they’re more likely to approve.
Q19: How Is the Discount Rate Determined?
The discount rate is primarily determined by the current interest rates and the level of risk perceived by the factoring company. This rate represents the company’s return on their investment in your payments and includes their operational costs and profit margin.
Q20: What Risks Are Involved in Selling My Structured Settlement?
Selling a structured settlement carries potential risks, including receiving significantly less than the total value of your payments, negatively impacting your long-term financial stability, and potentially affecting eligibility for need-based benefits. It’s essential to thoroughly understand these risks and consult with a financial advisor before proceeding with the sale.