Structured settlement/annuity payments are a valuable financial asset of the payee. In every Secondary Market transaction a payee transfers and assigns the right to receive future structured settlement/annuity payments in return for a present, lump sum cash payment from the transferee/assignee (the funding company). Thus, the payee is always getting less money (up front) than they would receive in the future if they waited and received the payments directly from the obligor/issuer as they come due. The purchase price is determined by calculating the discounted present value of the future stream of payments to be transferred/assigned by applying a discount rate.
Many factors go into determining the purchase price that the payee will receive and the discount rate that will be applied to determine the purchase price, but in all cases the payee will be giving up future money to receive a current lump sum payment. So, the payee should make sure they really, truly need to liquidate these payments, either to:
- achieve a desired goal (i.e. buy a house, start a business, continue one’s education, purchase a car, pay off debt, etc.)
- or to preserve an asset or address an immediate need (i.e. necessary medical procedure, lost job and need to maintain some income
- or pay bills to avoid losing assets, saving a house from foreclosure, get caught up on house payments/car payments, avoid bankruptcy, etc.).
The payee should avoid selling more payments than they need to address their need or achieve their objective. If you need $ 30,000 to get caught up on bills, house payments, car payments, and tie one over while the search for another job continues, then do not let anyone talk you into selling payments to raise $ 80,000.00. Building in some excess as a fudge factor, say raising $ 35,000.00, might make sense, but try to limit how much of one’s future payments one liquidates.
Additionally, it is important for payees to feel comfortable with the funding company. Don’t let anyone pressure you into a transaction. Read the documents that they send you. Sometimes, the company offering the most money for a particular transaction is still not the payee’s best option. There are funding companies, unfortunately, that include provisions in the transaction documents (i.e. rights of first refusal, onerous arbitration provisions requiring arbitration in far away places and impose arbitration fees on the payee, etc., security interests in all of one’s payments, etc.) that should be considered carefully and which might not be beneficial to the payee. I would always recommend doing business with a funding company that is a member of NASP.
Also, review carefully stipulations provided by issuers/obligors. There are indemnity provisions in there that could be problematic in the future. Don’t ever advance money to a funding company or a broker who claims that they will help you get your deal approved. The payee should never have to pay or advance funds to try and get these deals approved, EXCEPT if the payee chooses to consult with a financial advisor or lawyer regarding the transaction. Make sure that the person that you have consulted understands the transaction. Also, remember that your financial advisor/lawyer may not like the transaction and may advise you against it, BUT they work for you and their job is to support your decision, explain the transaction to you, and make sure that you are making an informed decision, NOT to substitute their judgment and view of the transaction for the payees.
Be wary of companies and brokers who claim that they can get your deal approved in another state. Always be open and honest with the court. These transactions are perfectly legal and the assets being liquidated belong to the payee. Courts may not like them all the time because the payees give up money in the future, but payees should be clear and direct with the Court that they have thought this through and that at this time this transaction makes sense for them. Payees who are unable to work and depend entirely on their structured settlement payments for their monthly income and necessities should think long and hard about these transactions and should endeavor to retain sufficient income and funds to insure that they will not be left destitute.