Should I Sell My Structured Settlement?

A structured settlement represents a financial arrangement where a claimant receives a series of periodic payments over an agreed-upon period, rather than a single lump sum. This payment structure commonly arises from legal settlements, particularly those involving personal injury claims, medical malpractice, or wrongful death lawsuits. These settlements are designed to provide long-term financial security and stability for the recipient. While structured settlements offer a predictable income stream, individuals may consider converting these future payments into immediate cash.

Understanding a Structured Settlement

A structured settlement functions as a financial asset, typically funded by an annuity purchased by the defendant or their insurer. This annuity guarantees a stream of payments to the claimant, providing a reliable and customized income schedule. For settlements arising from personal physical injuries, physical sickness, or wrongful death, these payments are generally excluded from federal, state, and local income taxes under Internal Revenue Code Section 104(a)(2). This tax-free status extends to any interest or investment earnings generated within the annuity.

Structured settlement agreements and the underlying annuity contracts often include non-assignability clauses. These provisions typically state that periodic payments cannot be accelerated, deferred, increased, or decreased. They also restrict the recipient’s ability to assign or transfer their right to receive future payments. These clauses ensure the long-term financial security intended by the settlement and maintain its tax-advantaged status, making the sale of a structured settlement subject to specific legal and financial considerations.

Reasons for Considering a Sale

Individuals might consider selling their structured settlement payments to address unexpected medical expenses not fully covered by insurance, such as costs for procedures or long-term care. Significant financial obligations, like high-interest debt, can also drive this decision. Using a lump sum to pay off credit card balances or other loans can alleviate financial pressure and improve overall financial health.

Major life investments or expenses, such as a down payment on a home, funding higher education, or starting a new business, can create a need for immediate capital. These circumstances highlight a shift in financial priorities, where a lump sum may offer a more immediate and effective solution than a series of periodic payments.

The Structured Settlement Sale Process

Selling structured settlement payments involves distinct phases, beginning with information gathering and culminating in a court-approved transaction. To obtain an initial quote, a structured settlement holder needs to compile specific documentation. This includes the original settlement agreement, annuity policy details, a schedule of future payments, and information about the annuity company. These documents allow factoring companies, which purchase structured settlement payments, to assess the value and formulate an offer.

Once a quote is obtained, the transaction enters a procedural phase that mandates legal oversight. State statutes, often called Structured Settlement Protection Acts (SSPA), govern these transactions and require court approval. The factoring company typically files a petition with the court where the seller resides, requesting approval for the transfer of payment rights.

During this legal proceeding, the court often requires the seller to obtain independent professional advice, which can include legal counsel and financial guidance. This requirement ensures the seller fully understands the implications of the sale and that the transaction is in their best interest.

A court hearing is a step where a judge reviews the proposed sale. The judge evaluates various factors, including the seller’s current living expenses, life expectancy, and future financial needs, to determine if the sale is appropriate. If the judge approves the transaction, a court order is issued, authorizing the transfer of the structured settlement payments to the factoring company. Following court approval, the sale is finalized, and the lump sum proceeds are disbursed to the seller. This process, from initial contact to funding, can take approximately 45 to 60 days, reflecting the legal complexities involved.

Financial Implications of a Sale

Selling structured settlement payments involves a “discount rate,” which impacts the lump sum received. The discount rate is the annual return a factoring company requires to purchase future payments, reflecting the time value of money and risk. This rate is applied to the future value of payments to determine their present cash value, meaning the lump sum received will be less than the total sum of all future payments. Typical discount rates range between 9% and 18%.

Beyond the discount rate, several fees and costs are associated with the transaction, further reducing the net amount received by the seller. These can include legal fees for court filings and representation, processing fees charged by the factoring company, and administrative costs. While some factoring companies may state they cover these costs, they are implicitly factored into the discount rate or overall offer. The net proceeds are calculated by taking the present value of future payments, as determined by the discount rate, and then subtracting all applicable fees and costs. Understanding these financial mechanics helps a seller assess the true cost of converting their structured settlement into immediate cash.

Alternative Financial Strategies

Before selling a structured settlement, individuals can explore alternative financial strategies. One option is a partial sale, where only a portion of future payments or a specific number of payments are sold. This allows the seller to receive a lump sum for immediate needs while retaining periodic payments for long-term security. For example, a seller might sell payments for the next five years to cover an expense, with the original payment schedule resuming afterward.

Another consideration, though often restricted by non-assignability clauses, is using the structured settlement as collateral for a loan. While this is generally not permissible due to tax advantages and protective clauses, it is worth exploring if unique circumstances or state laws allow such arrangements. Traditional financial planning strategies can also be beneficial, such as developing a detailed budget or pursuing debt consolidation loans. Seeking personal loans or lines of credit from banks or credit unions, if eligible, might provide needed funds without impacting the structured settlement. These alternatives offer different levels of flexibility and financial impact, requiring careful evaluation against immediate needs and long-term financial goals.