What are the pitfalls that people should be careful of when they sell structured settlement payments?

Patrick Hindert

Patrick Hindert

The first pitfall occurs if individuals “over-structure” when they settle their personal injury claims. An appropriate settlement plan should include an analysis that justifies periodic payments and anticipate changing circumstances and liquidity needs.

A second pitfall occurs if settlement documents include anti-assignment clauses, which do not specifically reference and permit transfers pursuant to IRC 5891 and state structured settlement protection statutes.

A third pitfall occurs if individuals settling personal injury claims with periodic payments do not understand:

  • their periodic payment contractual rights; and
  • the role and requirements of state protection statutes.

A fourth pitfall occurs when individuals sell structured settlement payment rights without first discussing alternatives with financial advisors.

A fifth pitfall occurs when individuals sell structured settlement payment rights without soliciting and comparing multiple offers and inquiring about commutation options.

A sixth pitfall occurs when individuals compare multiple offers without assistance from advisors who are knowledgeable about transfers and can help negotiate favorable terms including but not limited to price. These terms include the amount and allocation of expenses.

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Matt Bracy

Matt Bracy

One thing that potential sellers of structured settlement payments should carefully consider is whether they depend on the payments being assigned. No one should sell payments that they need in order to make ends meet, or if they are needed for medical treatment or care.

Sellers of structured settlement payments have an immediate need for cash. When they sell payments, they should match the amount they sell with that need, but no more. Structured settlements provide excellent long-term benefits and should be left intact as much as possible.

Finally, very careful planning and consideration should be given to how they will use the money. Every structured settlement seller should develop a detailed plan for the proceeds. This will help when the court considers the sale, and will also help focus the seller on making the best use of his or her resources. When the plan is done, this essential question should be asked: “Will I be better off selling these payments and using the lump sum of money I get in this way than I would be otherwise?” If so, then the sale is a good idea and the process of thinking this through will be useful in court.

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Joseph J Dehner

Joseph J Dehner

Two things really –

  1. Not taking enough time to think before concluding they must have money now versus waiting for the periodic, regular payments that a structured settlement provides; and
  2. failing to consider carefully the meaning of present value and discount rates.

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Earl Nesbitt

Earl Nesbitt

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.

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Eugene Ahtirski

Eugene Ahtirski

The 3 most common mistakes and/or pitfalls that sellers of structured settlement payment streams often make is first, that a sale of a payment stream is a fast and simple procedure. In truth, every transfer of a future payment stream is actually a sophisticated financial transaction that also requires court approval, and sometimes requires independent professional advice. Second, that all purchasers are the same; when the truth is that the ethics, customer service and business practices between purchasers are vastly different. Most important, that the interest/discount rate charged on a payment stream is standard across the industry (much like a home loan). But again, the quite the opposite is often true.

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Terry Taylor

Terry Taylor

Fast talking sales people in call centers and companies that call far to frequently trying to pressure the seller into signing a contract are way up there. However, the biggest pitfalls are in the purchase agreement itself. Most people do not really understand what the discount rate means and whether they are getting a reasonable amount for their future payments. Most people who need to sell their structured settlement are in dire need of the money and do not pay attention to the language of the document.

Some of the dangerous language often directs the entire structured settlement payments be paid to the purchasing company and then they will send the portion of the payment they did not purchase to the seller. At the very least that delays the payments, but if the purchasing company goes into bankruptcy the repercussions could be disastrous.

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