Introduction to Structured Settlements
A structured settlement is a financial arrangement that provides periodic payments to an individual, usually over many years. Structured settlements are often used to provide long-term financial support to accident victims and beneficiaries through an annuity funded by a lump-sum settlement payment or award.
Structured settlements have several key features:
– They are established through legal proceedings like a settlement or court judgement. The payments are tax-free under section 104(a)(2) of the Internal Revenue Code.
– Payments are made on a set schedule over a lifetime or for a fixed number of years. This provides stable, predictable income for the recipient.
– The annuity paying the structured settlement is owned by the obligor (typically a life insurance company), not the recipient. This provides safety through an insurance-backed guarantee.
– Payments are customized based on individual circumstances like life expectancy and financial needs. This allows structured payments to provide long-lasting financial security.
– Recipients cannot borrow against future payments or convert them to a lump sum. This ensures the stream of income remains intact.
Structured settlements can benefit recipients by providing steady, guaranteed income that is protected from risks like poor investing, mismanagement, or exploitation. But the locked-in payment schedule also limits financial flexibility. Some people seek to sell their structured settlements to gain immediate access to funds. But there are risks with selling, and most structured settlements cannot be sold. Thorough consideration of alternatives is encouraged before attempting to sell.
Why Sell a Structured Settlement
A structured settlement provides a steady stream of payments over many years. This arrangement offers financial security, but sometimes circumstances change and a lump sum of cash is needed right away. There are a few key reasons someone may want to sell their structured settlement:
Need cash now:
Selling the settlement provides immediate access to a large lump sum. This cash can be used to cover unexpected expenses like medical bills, home repairs, college tuition, or other major costs that have popped up. Rather than waiting on small installment payments over many years, selling the settlement releases funds when they are urgently needed.
Change in circumstances:
Life happens and situations change. Perhaps the recipient no longer needs the monthly income for ongoing expenses. They may have come into other funds or assets. Or, sadly, in case of divorce or death of a loved one, the structured settlement terms could change dramatically. Selling the settlement provides flexibility when life changes course.
Other investment opportunities:
Some people may opt to sell their structured settlement if other investments arise that seem like a better financial move for their situation. The lump sum can be reinvested elsewhere with hopes of higher returns. Of course, this involves some risk analysis and careful consideration.
Overall, selling a structured settlement allows the recipient to unlock funds for immediate use. This provides greater financial flexibility when circumstances change or current cash needs arise. The quick lump sum can be a lifeline in pressing situations.
Finding Buyers for Structured Settlements
If you decide to sell your structured settlement, the next step is finding potential buyers. There are a few places to look:
Structured Settlement Companies:
There are companies that specifically focus on buying structured settlement payments. They have the expertise and financing to quickly purchase structured settlements. Look for established companies with a solid reputation.
Settlement Purchasing Companies:
Similar to structured settlement companies, these businesses specialize in buying settlements of all types. They can assess and purchase structured settlements.
Online Marketplaces:
Websites like [J.G. Wentworth](https://www.jgwentworth.com/) and [Peachtree Financial Solutions](https://peachtreefinancialsolutions.com/) operate online marketplaces connecting sellers and buyers. This can be a convenient option.
Brokerage Firms:
Many financial service firms have brokers that can facilitate the sale of structured settlements. They have access to buyers and can consult on getting a good sale price.
When evaluating potential buyers, look for an established company, check their reputation through online reviews and the Better Business Bureau. Ensure they are following state regulations for structured settlement transfers. Compare multiple quotes to find the best offer price. Look for reasonable fees and a smooth transfer process. Doing your due diligence helps ensure you find a trustworthy buyer and maximize your payout.
The Transfer Process
The process of selling your structured settlement is complex and requires court approval. Here are the key steps:
Engage with a structured settlement purchaser:
The first step is to engage with a company that purchases structured settlements, known as a structured settlement factoring company. These companies will assess your situation and make you an offer to purchase all or part of your remaining structured settlement payments.
Court petition:
If you accept an offer, the factoring company will work with you to prepare a petition requesting court approval of the sale. This petition must be filed in the state where you originally settled your case.
Court hearing:
The court will schedule a hearing, during which the judge will consider whether the sale is in your best interests. You will generally need to appear in person to explain your reasons for the sale. The judge will also require certain disclosures and findings before approving the sale.
Funding:
Once court approval is obtained, the factoring company will provide the lump-sum payment, usually within a few weeks. The payment amount will reflect any fees and the discounted present value of your future payments.
Redirect payments:
Finally, the annuity company will redirect your future structured settlement payments to the factoring company as part of the sale agreement.
The transfer process typically takes 2-3 months from start to finish. There are costs involved, including legal fees and factoring fees, which will reduce the net amount you receive. It’s important to weigh these costs against the benefits of receiving a lump-sum payment now. With proper legal guidance, the transfer process can provide faster access to your settlement funds.
Pros of Selling a Structured Settlement
There are several potential benefits to selling your structured settlement payments:
Immediate Lump Sum:
Rather than receiving periodic payments over many years, you get a single immediate payment. This provides you with access to a large sum of cash upfront that can be used for major purchases, investments, paying off debts, or other needs.
Flexibility:
Structured settlement schedules are fixed, so you don’t have flexibility in when you receive the money. Selling provides immediate control over the funds. You can invest or spend the lump sum however makes the most financial sense for your situation.
Paying Off Debts:
Many people with structured settlements struggle with debt, whether it’s student loans, medical bills, credit cards, or other obligations. Selling your settlement provides funds that can be used to eliminate debts and achieve financial freedom. This allows you to start fresh without the burden of ongoing monthly payments.
The ability to access a substantial lump sum, gain control over the funds, and pay off debt are the most commonly cited benefits of selling structured settlements. While these advantages can be significant, it’s critical to weigh them against the downsides of giving up future stable income before making a decision. Consulting an attorney or financial advisor is highly recommended when considering selling your structured settlement.
Cons of Selling a Structured Settlement
Selling your structured settlement generally means giving up future income streams in exchange for a discounted lump sum payment upfront. This can create several drawbacks:
– You lose the reliability and predictability of scheduled payments over time. This regular income that you can count on is one of the main benefits of a structured settlement.
– You receive a heavily discounted lump sum instead of the full value of future payments. Structured settlement buyers apply steep discounts, sometimes only paying 10-30% of the total amount you would have received.
– You give up payments meant to cover future medical costs and living expenses down the road. This can jeopardize your long-term financial security if the lump sum runs out too quickly.
– Any medical conditions or living needs that led to the original structured settlement are likely still present. Losing guaranteed income intended to help with those needs can be problematic.
– If you lack financial discipline, you may spend the lump sum too fast and have nothing left. Spreading payments out over time makes it harder to waste a large windfall.
– You may face tax consequences by receiving a lump sum instead of periodic payments over many years. Consult a tax advisor.
– Once you sell payments, you can’t get them back. The decision is permanent.
Overall, selling your structured settlement transfers lifelong income streams into a single discounted lump sum. Make sure you understand the financial tradeoffs involved before moving forward.
Alternatives to Selling
For those who hold structured settlements but need access to cash, selling the payments may seem like the only option. However, there are a few alternatives that allow you to tap into the value of future payments without fully cashing out:
Settlement Advances
With a settlement advance, companies provide you with a lump sum cash advance on a portion of your future structured settlement payments. You get immediate funds, while the advance company collects repayments from your future payments when they come in. The advance company takes on the risk, so if you were to pass away earlier than expected, they may not be able to fully recoup the advance.
Advances allow you to access funds while keeping your original schedule of structured payments intact. You aren’t selling away all future rights. However, the lump sum will be significantly discounted based on risk, and interest rates tend to be very high.
Structured Settlement Loans
These work similar to advances, but are structured as loans with defined repayment schedules, rather than being tied directly to your future settlement payments. You’ll get a lump sum upfront, then make fixed repayments over time. If you fail to repay as agreed, the lender can take legal action.
Interest rates and fees make these loans expensive. And not all states allow this type of loan against settlement payments. But for some, loans allow more flexibility than advances.
Borrowing Against Payments
Some settlement recipients opt to take out a loan or line of credit using their future payments as collateral. Traditional banks or credit unions may offer better rates than settlement lenders or advance companies. However, you’ll likely need good credit to qualify.
This allows you to access funds while keeping ownership of all settlement payments. But if you default, the bank can take your payments, leaving you with nothing.
For those with structured settlements seeking immediate cash, there are alternatives to selling that may make sense in certain situations. But they come with disadvantages like high fees, interest, and risk. Selling provides funds up front but permanently signs away your future rights. Carefully weigh all options before making a choice.
Factors to Consider
Selling your structured settlement is a big financial decision that requires careful thought. Here are some important factors to weigh before deciding whether to sell your payments:
Current financial situation:
Take an honest look at your current financial standing. Are you facing an emergency or serious hardship that requires quick funds? Or do you simply want extra cash for discretionary spending? Understanding the “why” behind selling will help determine if it’s your best option.
Future financial needs:
Consider your future financial responsibilities and goals. Will you need the steady income from the settlement down the road? How might losing future payments impact your long-term security? Think about your future financial needs realistically.
Timing and duration of payments
Review the timeline of your remaining payments. Are you selling just a few payments or the entire length of the structured settlement? The longer the payment schedule, the greater the potential future value you’re forfeiting. Understand the true scope of rights you’re signing over.
Fees, costs, and fine print:
Read the fine print to determine the full costs, fees, charges, penalties, and terms involved. Factor all direct and indirect expenses into your decision. Understand the full financial impact, not just the lump sum being offered.
Alternatives considered:
Before settling on selling, research alternatives like settlement advances or loans using just a portion of payments. Whether any alternatives exist depends on your specific settlement terms.
Carefully weighing these key factors will help inform whether liquidating your structured settlement is the right financial move for your situation. Don’t rush this big decision.
Tax Implications
Selling a structured settlement can have tax consequences that need to be considered. When you originally received the structured settlement, the payments were not taxed. However, when you sell future payments for a lump sum, that lump sum becomes taxable income.
The amount that will be taxed is the difference between the lump sum payment you receive and the cost basis, which is the total of all future payments sold, discounted to present value. For example, if you sell $100,000 in future payments for a $70,000 lump sum, the $30,000 difference is considered taxable income.
Any taxes owed on the lump sum payment would be due that tax year. The lump sum is taxed as ordinary income, so federal income tax rates and state income tax rates (if applicable) will apply. The company buying your structured settlement should withhold a portion for taxes before issuing the net lump sum payment to you.
Depending on your total taxable income and deductions for the year, selling a structured settlement could potentially push you into a higher tax bracket. It’s important to run the numbers with a tax professional and consider the tax hit before finalizing a structured settlement sale. There may be options to structure the sale over multiple years to spread out the tax liability.
Advice for Selling Structured Settlements
Selling a structured settlement is a major financial decision that requires careful consideration. Here are some tips for getting the best deal and using the proceeds wisely if you decide to sell:
Tips for Getting the Best Deal
– Shop around and get quotes from multiple buying companies. Compare the lump sum offers, fees, and net payouts.
– Negotiate! Many buying companies expect you to negotiate. Don’t accept the first offer.
– Read all paperwork carefully before signing any contracts. Make sure you understand any fees deducted from your payout.
– Consider hiring an independent professional advisor to review the deal. An advisor can help ensure you get the maximum value.
– Avoid companies that pressure you to complete the deal quickly. Take your time and make an informed decision.
Using the Proceeds Wisely
– Don’t rush to spend the lump sum payout. Park the funds in a savings account initially while you make a plan.
– Pay off any high-interest debts first before making other major purchases.
– Set aside a portion, such as 20-30%, in a conservative investment fund to generate interest income.
– Use a portion to build up an emergency fund with 3-6 months of living expenses.
– Avoid spending recklessly on depreciating luxury items. The payout should improve your long-term financial situation.
– Consider using a portion to increase retirement contributions or other wise investments.
– Get expert tax advice to minimize any tax liabilities on the payout.
– Don’t tell too many people about receiving the lump sum payout to avoid requests for money.
Let me know if you would like me to expand or modify the advice in this section further. I aimed to provide actionable tips for getting the maximum value when selling and using the proceeds prudently.