What are good reasons for people to sell and what are bad reasons, and can you provide any real life examples of each type that you have heard about?

Patrick Hindert

Patrick Hindert

Most “good” and “bad” reasons for individuals to sell structured settlement payment rights result from bad settlement planning. Bad settlement planning includes: “Over-structuring” without adequate liquidity or diversification

  • Failure to plan for future contingencies and/or uncertainties
  • Failure to justify that tax-exempt periodic payments are in the recipients’ “best interest” or at least meet a product suitability standard
  • Significant mismatching of periodic payment amounts and payout patterns with anticipated needs
  • Inappropriately locking minors into future periodic payments following their age of majority
  • Failure of specific annuity-financed periodic payments to meet Medicaid qualification requirements.
  • Other “bad” reasons could result from “buyers’ remorse” and/or poorly considered or self-serving post-settlement advice.

“Good” reasons to sell could result from dramatic, “unanticipated” changes in circumstances without better available financial alternatives. For example, financial deterioration of periodic payment obligors assuming willing structured settlement payment right purchasers exist.

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Matt Bracy

Matt Bracy

Each decision to sell structured settlement payments is unique to the individual. Long ago I learned not to rush to label reasons as “good” or “bad” in the abstract. Ultimately, reasons for selling payments are as varied and complicated as people themselves. For example, you could say it is a “bad” reason to sell payments so you can take a vacation. What if the seller is dying, and this is an effort to spend good time with his family? Imagine a seller’s reason to sell is that she just doesn’t want to get the checks on a monthly basis anymore. At first blush that may seem like a financially irresponsible position. What if you learned that each month she gets the checks, she is reminded of the injury that she suffered, and it has a detrimental impact on her psychological wellbeing? The converse can also be true. What if a seller wants to sell payments in order to pay off debt? That is a common reason for selling, and generally a pretty good one. But what if the payments he is selling would leave him with no way to support himself on a monthly basis, even after elimination of the debt?

To some, these may seem like farfetched and made-up examples, but they are actually based on real people. The state structured settlement protection acts – state laws that regulate how structured settlement payments can be sold – include a very general provision that the court must find the transfer to be in the seller’s “best interest.” There is no real definitive guidance for what that means. This was left intentionally vague, so that the judge could consider all the issues and the seller’s total situation in making the decision to approve or deny the transfer.

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Joseph J Dehner

Joseph J Dehner

Let’s start with bad reasons, they include:

  • Helping relatives
  • Wanting to start a business
  • Paying off credit card debt
  • Living beyond one’s lifetime means

There can be “good” reasons – such as:

  • Unanticipated real-life needs where government benefits are not available (medical needs not met by insurance or Medicare or other programs)
  • Investment into advancing job-readiness skills
  • Similar capital-building programs that truly substitute for the regular payments that will be surrendered at a cost

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Earl Nesbitt

Earl Nesbitt

There are many good reasons for a person to sell. I know of one gentleman who liquidated his payments to participate and pay for a Navajo Indian ceremony. He was a Navajo Indian and the ceremony was important to him and his heritage. There was a cost involved. Typically, most people choose to liquidate their future structured settlement payments because they find that they have a need for immediate cash to address a personal or family need, often that was unanticipated (i.e. loss of a job, resulting in falling behind in bills or house payments; a medical illness) or because they want to achieve a personal, family, or financial objective (i.e. educational needs for one’s self or family members; moving to a new area for a job opportunity; business/job opportunity; desire to purchase a home or automobile; etc.).

Judges are less likely to view a transaction favorably if the payee/annuitant is young (less than 25 years old). The typical thought process is that younger people are more likely to make unwise financial decisions. Selling structured settlement/annuity payments to “invest” in the stock market, or other passive ventures, or to put money in savings is almost always viewed by courts as unwise. The reason for this is that the payee is giving up future tax-free income/structured settlement payments (discounted to present value at a discount rate of 12 or 15%) to “invest” in assets or a venture where the return will be taxable. Economically and financially that is not a good bet.

Investing in a business in which the payee is going to be actively working and owning is another thing altogether. Courts are more willing to allow competent, mature, intelligent payees/annuitants to take a risk in a business venture if they have experience in the business and/or if they have the ability to replace the income they are giving up in the future by working if their business venture does not succeed as anticipated. (Again, this depends on the Judge.) For instance, a payee/annuitant and her husband owned two truck rigs, but worked as an independent contractor for a large trucking company. They had to wait to get jobs from the large trucking company and the large trucking company gave first preference on their jobs to their own trucks and employee/drivers. The payee/annuitant had a CDL and the payee/annuitant’s husband had been driving trucks for 25 years. They owned the rigs outright, but needed to get registration, licenses, fuel, working capital, tires for one of the rigs, etc. They would be giving up monthly income for a couple of months while they were getting started and awaiting payment from their customers, but the business was there, they were experienced, and the potential income was 3 or 4 times what they were currently making. It was a risk, but a reasonable risk, and the Judge allowed them to complete the transfer.
Judges are less likely to approve a transfer if the payee has completed multiple transactions in the past. The “serial seller” if you will, is viewed by courts as not being able to manage their money well and a possible spendthrift.

Selling to take a vacation is likely not going to be a good reason. That could change if the payee is suffering from a terminal illness and payments 5, 10, or 15 year in the future will have no value to them.

Like what Earl Nesbitt has to say? Read their opinion on our other Structured Settlement Roundtable topics.

Eugene Ahtirski

Eugene Ahtirski

Good reasons include paying off major debt (credit card or otherwise). And because a sale of a structured settlement is a permanent solution that does not require a seller to re-pay a “loan”, a sale allows a seller to end what could be a never ending revolving credit card debt cycle. For example, if one only continues to make minimum monthly payments against a credit card that debt will never be paid off but instead continue to rise indefinitely due to the compounding nature of interest rates.

Other good reasons include the down payment on the purchase of a home, and often to provide a solution to an immediate financial crisis, such as a loss of a job where a person has no savings and is unable to pay day to day living expenses and possible eviction, etc. until a new job is found.

Bad reasons are the “lure” of what appears to be “easy money” with no specific immediate and/or long term financial goals for the funds to be received from the sale.

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Terry Taylor

Terry Taylor

I am not sure there is a good reason. Any time one of my clients has had to sell a portion of their structured settlement they have been in a bad situation and in need of help. I still believe that if the structured settlement is designed well to take care of the claimant, it should only be sold as a last resort.

However, I do believe there are times when selling a structured settlement is the best option in a bad situation. I have helped my clients in several instances to make sure that the payment they receive for their structure are reasonable and the contract language is not restrictive. Those have included health reasons, saving a home from foreclosure and even to attend college. The bad reasons are because you saw an advertisement on TV, need a new toy or for spending money. I consider all of these bad reasons to sell a structured settlement.

I don’t agree with many people in the structured settlement industry and attorneys, who will not help a past client sell their structured settlement. These people are my clients and when circumstances change and they are in need of money, I feel it is incumbent on me to make sure they are not taken advantage of by a factoring company. I still feel better about this when the sale is not for a frivolous reason.

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