Know of some of the industry's common practices before selling your structured settlement payments.
Structured settlements provide long-term financial security as long as life occurs as planned. But faced with urgent needs, selling one’s remaining periodic payments, called a “factoring transaction“, may be the only option available. Thus an annuitant would sell a portion (or all) of his remaining periodic payments in exchange of a lump-sum payment.
The immediate relief this lump sum payment might provide ought to be compared to the often hidden negative effects of a factoring transaction.
The annuitant must ponder different aspects of a structured settlement factoring transaction in order to avoid financial problems in the future. Indeed, articles and books showed that annuitants were often exploited and fell back on public assistance. This article will shed light on its most important aspects.
To learn about structured settlements, read our article Structured Settlement: Opportunities? Probably.
To choose your structured settlement factoring company, read our article 30 Structured Settlement Factoring Companies.
As stated in our article, structured settlements were created in order to provide long-term benefits. Anti-assignment clauses were therefore incorporated in structured settlement agreements in order to avoid the “squandering plaintiff” (link) effect.
Notwithstanding these clauses, laws or court decisions, in the late 90’s, a secondary market grew out of the primary: the structured settlement factoring industry. By witty marketing, factoring companies promised payees lump-sum in exchange of their remaining periodic payments. They were utterly exploited. The majority of payees were unable to grasp the worth of their remaining payments. Factoring companies therefore would exploit them by charging discounts as high as 70%.
In 1997, in order to protect annuitants, was enacted in Illinois the Structured Settlement Protection Act (SSPA), “developed by the National Structured Settlement Trade Association […] in cooperation with attorneys general, state bar organizations, and others concerned about protecting structured settlements.” which aim is to set minimum requirements in order to sell one’s settlement.1Daniel W. Hindert & Craig H. Ulman, “Transfers of Structured Settlement Payment Rights – What Judges Should Know About Structured Settlement Protection Acts”, The Judges’ Journal, Spring 2005, Vol. 44 N° 2.
Every SSPA follows the same model. Under each one of them:
1. The factoring company must disclose the value of the remaining payments and contrast it with the lump-sum.
2.The transaction must serve “the best interests of the payee and the payee’s dependents and/or is necessary to enable them to avoid hardships.”2Idem.
While keeping in sight that the transaction ought to be in payee’s “best interest”, judges “scrutinize applicable law with different focuses”. Indeed, Courts have different approaches while defining the payee’s “best interests”. Some courts have required a showing of an “unforeseeable change in circumstances” others have adopted a more flexible approach.3Idem.
The first step for annuitants is to look for anti-assignment disclosures in their structured settlement agreement (or annuity contract, or both). Structured settlements agreements “almost always contain provisions prohibiting the plaintiff from assigning his right to receive the payments to a third party.”4Gregory Scott Crespi, “Selling Structured Settlements: The Uncertain Effect of Anti-Assignment Clauses”, 28, Pepperdine Law Review 4 (2001): 790. Available at Pepperdine Law Review.
There are three main ways an insurer can block a structured settlement factoring transaction5Idem..
1. In States where a Court approval is needed in order to sell one’s rights, the insurer may “challenge the validity”6Idem. of the assignment on the basis of the clause.
2. In States where not Court approval is needed, after an assignment is attempted, the insurer may refuse to forward the payments to the new assignee on the basis of the clause. The assignee files then a “declaratory judgment suit seeking to have the assignment declared effective.”7Idem.
3. “A payee who has assigned his payment rights may subsequently enter into bankruptcy, and the bankruptcy trustee may attempt to establish, on the basis of an anti-assignment clause, that the purportedly assigned payment rights are still part of the debtor’s estate.”8Idem.
Nevertheless, some Courts choose to maintain the validity of the factoring transactions, even if they recognize a breach of contract, while others do not.9Ibidem, page 791. This leads to 95% of factoring transactions being accepted.10Jeremy Babener, “Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History.” New York University Journal of Legislation and Public Policy, (2010): 40. Accessed March 2016. Available at: N.Y.U Journal Of Legislation And Public Policy (pdf).[Hereinafter Babener, Single-Claimant QSF]. Some structured settlement factoring companies circumvent anti-assignment clauses by directing plaintiffs to factoring company addresses.11Ibidem, page 42.
Factoring transactions fall under the Internal Revenue Code Section 104(a)(2), making them tax-free. The Victims of Terrorism Tax Relief Act of 2001 created the section 5891 of the Internal Revenue Code. IRC Section 5891 recognizes and reinforces the SSPAs. It imposes a 40% exercise tax on any party that acquires payment rights in a “structured settlement factoring transaction”, unless it is approved by a qualified order (the qualified order being a judgement or decree).12Idem.
“Structured settlements provide strong public policy benefits. They provide long-term protection for injury victims and their families. They provide against the loss or dissipation of lump sum recoveries. Factoring companies, commonly using phone banks, advertising and high-pressure sales to “buy” a settlement for a small-lump-sum, undermine these benefits and may exploit and injured person at a time when they need cash.”
Usually this operation is done at least ten years after the original settlement and by chunks: a few months this year, then a few months later. 13Ibidem, page 32. There is 8 000 operations per year (in the United States), totaling $360m, which represents between 5% and 8% of all structured settlements.14Idem.
The average waiting period to receive the lump-sum is three months.15Ibidem, page 34. Some companies deliver the money within three to six weeks and others within a week16Idem.. Some may still advance cash within days17Idem..
If the plaintiff chooses to factor, he must take into account the discount rate. “This means that a structured settlement owner due future payments with a present value of $100,000 might sell the stream of income for an immediate lump-sum of $25,000. Authors point to plaintiffs selling their future payments in desperation as the primary cause of the factoring industry’s growth“.18Idem.
Example of a disastrous structured settlement factoring case
In 198819Terrence McCoy, “The flawed system that allows companies to make millions off the injured”, The Washington Post, December 2015. Accessed April 2016. Available at The Washington Post., Terrence Taylor, a 6-year old boy, suffered serious injuries for having slept next to a space-heater. One year later he settled a structured settlement with the space-heater manufacturer with an expected lifetime payout of $31.5 Million. Afterwards, Taylor was later diagnosed with “‘cognitive deficiency’ which likely predated the burns but could ‘accelerate’ in their aftermath”.
Structured settlement factoring companies, which “comb though court documents, pay people hundreds of dollars for referrals […] maintains a database with thousands of potential sellers from all over the country, their names, their phone numbers…” go hunting for people in bad situations and try to get them hooked on easy, fast money.
One of these structured settlement factoring company found Taylor and “coached him” to came up with excuses in order to convince the Judge that selling his rights was in his best interests and that he knew what he was doing. The problem is that the case was heard in a Court miles away from Taylor, without his presence, which is legal in Virginia, where it happened.
Faking to be his friend, an associate of the firm went to Taylor to strip-clubs and even wired money from his own account to Taylor. In total, “the burn survivor sold $11 million […] for roughly $1.4 million.” Such profits for a structured settlement factoring industry is highly unusual. When Taylor talked about his payments past 2044, the associate cut all contact with him. Taylor is now broke and lives with his mother.
Sources [ + ]
|1.||↑||Daniel W. Hindert & Craig H. Ulman, “Transfers of Structured Settlement Payment Rights – What Judges Should Know About Structured Settlement Protection Acts”, The Judges’ Journal, Spring 2005, Vol. 44 N° 2.|
|4.||↑||Gregory Scott Crespi, “Selling Structured Settlements: The Uncertain Effect of Anti-Assignment Clauses”, 28, Pepperdine Law Review 4 (2001): 790. Available at Pepperdine Law Review.|
|9.||↑||Ibidem, page 791.|
|10.||↑||Jeremy Babener, “Structured Settlements and Single-Claimant Qualified Settlement Funds: Regulating in Accordance with Structured Settlement History.” New York University Journal of Legislation and Public Policy, (2010): 40. Accessed March 2016. Available at: N.Y.U Journal Of Legislation And Public Policy (pdf).[Hereinafter Babener, Single-Claimant QSF].|
|11.||↑||Ibidem, page 42.|
|13.||↑||Ibidem, page 32.|
|15.||↑||Ibidem, page 34.|
|19.||↑||Terrence McCoy, “The flawed system that allows companies to make millions off the injured”, The Washington Post, December 2015. Accessed April 2016. Available at The Washington Post.|