It’s your money and they want it now!
By J. Christopher Munley
We all have seen the hard-hitting television commercials decrying: “It’s your money and you want it now!” These get-your-cash now ads, while seemingly helpful to those experiencing financial hardship, prey on individuals who have money in structured settlements.
They may seem too good to be true — and in most instances they are. What these ads don’t disclose is that the realized value to you now of this money owed to you in the future will be less than the amounts in the settlement, sometimes up to 40 percent less.
The ads are designed and created by companies that are in the business of purchasing structured settlements, otherwise known as “factoring companies,” and it is their goal to entice structured settlements holders to sell their settlements in exchange for a lump sum payment at the “present value” of the structure.
Unfortunately, many people who own these structured settlements don’t understand the economic downside of selling their structures and don’t realize the value of what they are giving up in exchange for quick cash.
Companies that purchase structured settlements lure individuals in with the notion that they will help free them from the hold that has been placed over their money and, in order to make money on the purchase, they often pay the owner far less than even the present value of the structure.
Structured settlements are most commonly used in conjunction with personal-injury lawsuit settlements and by their nature are intended to protect those who could fall victim to scams and designing influences.
Structures are carefully created with the specific input of all parties. How much is placed into the structure, how long the structure will last and what the projected payouts will be are all detailed to the individual before a structure agreement is signed. It is a way for accident victims to receive guaranteed, tax-free income tailored to their future needs.
Once a structure agreement is entered into, a court must approve the creation of the structure before any money is transferred into the structure. Once created, it takes an order of the same court to change any of the terms of the structure including its sale.
Structure figures are based on the accumulation of interest over time and therefore the payout amount does not exist until the maturity date.
In 1982, Congress amended the tax law to allow the interest gained on structured settlements to be tax-exempt — therefore, when the proceeds of a settlement are put directly into a structured settlement, any accrued interest on that money is not subject to income tax
Factoring companies that purchase an individual’s structured settlement will place a value, which is called a “discount rate” on the total amount they are purchasing. This is the number that determines how much an individual will receive for his/her annuity. The higher the number, the lower the payout. With the abundance of structured settlements in place, an entire industry has grown up around the purchase of those settlements from beneficiaries.
Competition for business is stiff, and often consumers are misled by representatives of factoring companies trying to purchase their settlement. They are told they have lawyers who know how to get this approved quickly or have ways of making certain legal hurdles disappear. Despite their claims, no one factoring company has a better chance of getting court approval than any other. They simply employ some deceptive marketing techniques to make the consumer believe they are the only company that can help them.
The truth is that, by law, the sale of your structured settlement has to be approved by the court and the court will have certain criteria that must be met for an approval to be issued. The factoring company buying the structured settlement is required to disclose to the seller the difference between the value of the settlement payments versus the value if sold and also a summary of the terms of the transaction. The judge must find that the transfer will serve in the best interest of the payee and/or any dependents and is necessary to prevent undue financial hardship. All “interested parties” must be identified, giving them an opportunity to oppose, support or respond to the transfer, and finally, the transfer must not contravene any applicable federal or state statute, court order, judgment or decree.
In the end, anyone who holds a structured settlement and considers selling it must understand that they are going to lose the vast majority of the final payout of their structure. The commercials should really say “It’s your money and WE want it now.”
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