Let's Be Careful Out There
Friday, September 26, 2008 at 03:41PM One of my favorite TV shows from the 80s, or ever really, was “Hill Street Blues.” If you're old enough to remember it, you may recall Sgt. Esterhaus at the end of each day’s briefing sternly but grandfatherly telling all the cops "let's be careful out there." As we all try to figure out how the current “Wall Street Blues” will shake out, I think this is sound advice, particularly for people who have structured settlements or are contemplating entering into structured settlements.
Hysteria and panic are generally bad bases for making financial decisions. All indications are that the backbone of the American insurance industry remains strong and stable. Effective state insurance laws that closely regulate the type and diversity of assets that insurers can hold (that back-up the insurance obligations) are working. Consider for instance the largest and most prominent insurance company, AIG. Headlines scream that AIG is “in trouble” and so forth. Read further and you will see, almost mentioned in passing, that the insurance business units at AIG, particularly the life insurance companies, seem to be sound. The fact that potential buyers are clamoring for AIG’s insurance lines should tell us all something.
The insurance business is unique. In our otherwise generally laissez-faire economy, insurance is excruciatingly and minutely controlled by state regulators. Details concerning what can be sold and to whom, and how payment obligations and risks are planned for and capitalized are all subject to strict rules and review. By all accounts at this point, the system is working, even at AIG.
Some insurers have failed in the past to be sure. But to echo remarks made by Messrs. Darer and Cravenho, these are few and far between. The largest “failure” that I know of is Executive Life of New York (ELNY). In 1991 ELNY was taken over by the State of New York and has been in “rehabilitation” ever since. To date, all policies have been paying as planned. Recent news was made when regulators from New York determined that there might be a shortfall in 12-15 years unless corrective action is taken now. Let me summarize: This “failed” insurer has been able to pay 100% of its obligations for the past 17 years, and while ELNY is likely to need its own bailout/rescue from New York regulators, it appears that individual payees of ELNY structured settlement annuities should fair well in the ultimate resolution of this company. To be sure, the projected shortfall needs to be addressed, and I think it will be, but individual payees should take comfort from this example of a “failure.”
AIG is not only one of the largest insurers, but is one of the largest structured settlement annuity issuers. Structured settlements remain a very viable and useful means of settling personal injury lawsuits, providing long-term financial security for tort victims. Predictable and reliable monthly or yearly tax-free income is a great boon for these former plaintiffs and their families, and all indications are that nothing in this current economic turmoil will diminish those benefits. Structured settlement recipients and their advisors should think twice about trying to “dump” this asset in the face of generally bad economic news. The “best interest” standard given in the federal tax code and in most state transfer laws still applies, and a decision to liquidate all of one’s future structured settlement payments in a factoring transaction because of bad news in the press is probably a bad one. Moreover, liquidating solely because of fear and uncertainty relative to the financial circumstances of AIG or any other annuity issuer would likely not meet the best interest standard required for court approval of a transfer.
However, if a structured settlement recipient does have a real need to sell future payments, structured settlement factoring companies can help. But, in this and all things, “let’s be careful out there.”
If you would like to discuss this or any other matter, please contact me at mbracy@setcap.com. I welcome comments to this and all articles, either here on the blog, or privately to me via email or phone.
Don’t Mess With Taxes: Inaccuracies Abound in Structured Settlement Reporting
Wednesday, July 16, 2008 at 02:55PM I don’t know what it is about structured settlements and structured settlement factoring, but for some reason blatant inaccuracies seem more prevalent than truth in reporting on these topics. Personally I don’t think the facts are all that hard to get right, but maybe I’ve just been around too long.
The latest entry in the bad reporting category to catch my eye was Tim Grant’s piece in the Pittsburgh Post-Gazette, confusingly titled “Structured Settlements Of Money Take Away Risks Of Lump-Sum Payments” (first appearing in the Post-Gazette on June 25, 2008). You can read Mr. Grant’s article here.
Lest anyone should think I am picking on Mr. Grant, you should know that I sent him a personal email on June 25, 2008, which is copied below. Hearing nothing in response, I sent a letter to the editor of the Post-Gazette on June 30, 2008. Again, nothing (and my letter was not, to my knowledge, published). Is this willful blindness or something more sinister at work here?
Although Mr. Grant’s article is replete with error, one whopper stands out:
“Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.”
Many ill-informed commentators get confused about the tax treatment of structured settlement payments and factoring transaction lump sums. Breaking Mr. Grant’s assertion down to a simple form, he says that payments from structured settlements are income tax free (true), while lump sum payments are not (false). Lump sum payments in settlement of personal injury damages are income tax free under Internal Revenue Code 104(a)(2). Further, lump sums received from a factoring transaction are also income tax free, as was clarified over nine years ago by IRS Private Letter Ruling 1999-36030, and more recently by IRC 5891.
Manufactured confusion about taxes has long been used to scare people away from factoring. The bottom line is that income tax is not an issue to be concerned about, whether you are taking a lump sum in settlement of a personal injury claim at settlement, accepting payments over time in a structured settlement, or selling some or all of your future structured settlement payments.
The full text of my letter to Tim Grant:
As always I welcome your comments, questions and suggestions. You can reach me at mbracy@setcap.com.Mr. Grant:
I read with interest your story about structured settlements. I did, however, find some inaccuracies in the story of which you should be aware.
First, you state that “Unlike lump sum settlements, payments from structured settlements are income tax free and the benefits are guaranteed for life by insurance companies.” This sentence actually contains two inaccurate assertions: (1) that lump sum settlements are not tax free, and (2) the implication that all structured settlements are guaranteed for life. On the first point, under Internal Revenue Code § 104, all personal injury damage payments are excluded from income tax. This is true irrespective of whether the payment is a lump sum or received over time in a structured settlement [see IRC 104(a)(2)]. The second point, that structured settlement payments are guaranteed for life, is true in some circumstances but not all. Sometimes the payments are guaranteed for a time certain (for instance, 20 years), and then for the life of the payee thereafter, but this is not always the case. Many structured settlements are for a certain number of years only.
Finally, your story is replete with statements about the structured settlement payee’s inability to convert all or part of the future payments into either a present lump sum or to take a loan against the future payments. This is simply untrue. Forty-six states (including Pennsylvania) have structured settlement transfer laws which allow people, under some circumstances and with court approval, to sell future structured settlement payments, or to use the payments as collateral for a loan (see, e.g., the Pennsylvania Structured Settlement Protection Act, 40 P.S. 4001 et seq.).
I am general counsel to a company that provides such liquidity options to structured settlement recipients when needed. As your story accurately reports, structured settlements are a very valuable mechanism for settling personal injury lawsuits. In the vast majority of cases, the structured settlement works as planned. Occasionally, however, a life change or other unanticipated event occurs after the settlement and the payee finds that he or she needs more money than the periodic payments provide. In such circumstances, and within the rubrics of the various structured settlement transfer laws, part or all of the payee’s future payments can be sold (or pledged as security for a loan).
If you would like any further information on this topic, please feel free to visit our blog site (http://blog.setcap.com/), read the Wikipedia article on structured settlement transfers or “factoring”
(http://en.wikipedia.org/wiki/Structured_settlement_factoring_transaction), or contact me. Thank you for your attention to this matter, and for writing about this important topic.
Matt Bracy
General Counsel
Settlement Capital Corporation
14755 Preston Rd., Ste. 130
Dallas , Texas 75254 972-450-5864
Part 3 of "A Critical View of Factoring"
Monday, June 2, 2008 at 11:30AM In this third and final installment of my video interview with Jan Schlichtmann, Mr. Schlichtmann concludes his "cross-examination." As always, I look forward to your comments. You can reach me at mbracy@setcap.com.
Part 2 of "A Critical View of Factoring"
Friday, May 16, 2008 at 09:17AM Click below for part 2 of Jan Schlichtmann's "cross-examination" of me on factoring issues. As always, I look forward to your comments and questions. You can reach me directly at mbracy@setcap.com
Video: A Critical View of Factoring with Jan Schlichtmann (Part 1)
Wednesday, May 7, 2008 at 11:57AM 
Late last year renowned plaintiff’s attorney Jan Schlichtmann (of “A Civil Action” fame) presented me with an interesting opportunity. He said he really didn’t like structured settlement factoring and had lots of questions about how it works and problems with the practice. I suggested that he “cross-examine” me, on video tape, with no script or preparation. For almost an hour we let the tape roll and had a very interesting conversation that I think you will find informative and provocative.
The first part of this video interview is available now (below), with the second and third parts to come soon.
Factoring 101: The Truth About Servicing
Tuesday, April 22, 2008 at 04:17PM This is the first article in a new series on structured settlement factoring basics. These articles will attempt to educate about factoring, open a dialogue on some basic factoring issues, and dispel rumors and misunderstandings. If there is a topic you think should be addressed here, please let me know.
“Servicing” refers to a common practice in structured settlement factoring transactions, where only part of a monthly or lump sum payment is purchased by a factoring company, but the factoring company receives the entire payment. Once received, the factoring company sends the unpurchased portion to the seller/payee. As explained below this is actually a good and necessary practice (contrary to comments by John Darer and Andrew Cravenho, who seem to not fully understand it).
Servicing can best be understood in the context of a typical factoring transaction. Here’s an example: Assume a payee receives $1,000 per month from a structured settlement. The payee has a need for a lump sum for some reason, let’s say it’s to replace an old and not working car.
First Question: How Much?
The payee (now “seller”) contacts a structured settlement factoring company, who first asks the seller how much money they need and why. The new car costs $20,000, and without reliable transportation the seller can’t get to work.
Second Question: How Many?
There are many options available to the seller to reach the desired funding amount, and many factors will go into this analysis. One option would be for the seller to transfer 100% of the monthly payments for a period of time. Under this scenario, the seller would transfer about a couple years worth of payments to generate the desired $20,000.
An obvious problem with this scenario is that it leaves the seller with no monthly income from the structured settlement during those years. Depending on the individual circumstances of the seller, that might be acceptable. For others who rely on some of that monthly income for fixed costs, that would not be the best alternative.
Another option would be to sell just a portion of the monthly payments. For example, the seller could receive $20,000 by transferring $500 per month out of the total $1000. Under this scenario, the seller would need to sell more months of payments, but will be keeping $500 per month throughout. For the remainder of this hypothetical example I will assume that this is the most desirable course for the seller.
Third Question: How’s it done?
Most structured settlement factoring transfers involve only part of the structured settlement payment stream. Sometimes that part is 100% of the payments, but only for a period of time less than the total payment stream (as in the first example above). Sometimes, probably most often, the partial transfer is of a part of the monthly payments or lump sum (as in the latter example above).
There are two ways to accomplish this kind of transfer. First, which is the easiest and preferred method, is for the insurance company that issues the payments to “split” the payments in question, sending the purchased part to the factoring company and rest to the payee/seller. However, in some cases and for a variety of reasons, the issuer will not agree to split the payments. When the payments cannot be split, the only other option is for the entire payment to be sent to the factoring company, who in turn sends the unpurchased portion to the payee/seller. This is called “servicing.”
In circumstances where the annuity issuer will not agree to split payments, servicing is the best alternative for the annuitant. Absent the servicing option, sellers would either not be able to factor payments at all, or would be forced to sell more payments than necessary (or more than is in their best interest to sell). I am not aware of any factoring company that charges a fee for servicing payments in this way. Payees receive their serviced portions promptly and generally experience no significant delay.
Such servicing arrangements should be reflected in the transfer order. Payees/sellers who later elect to sell more payments should be free to do so, and the order approving the subsequent purchase should simply reflect that the prior order is amended as to the servicing and the serviced portion should now go to the new factoring company.
If you have any questions about servicing or factoring in general, please do not hesitate to contact me at mbracy@setcap.com.
***Update 4/23/2008: Messrs. Darer and Cravenho have both responded to this article on their blogsites. My response is attached as a comment to Mr. Darer's blog post here.
West Virginia Wrap-Up
Tuesday, March 25, 2008 at 04:42PM A structured settlement factoring bill did pass the West Virginia legislature this year, and is at this moment on the Governor’s desk. This bill (HB 4613), which is anticipated will become law shortly, differs drastically from the original proposal that caused such a stir (see our last blog post, “What’s Going On in West Virginia?”). In addition to cleaning up some outdated provisions, the new law confirms that a judge may (not “must”) appoint a guardian ad litem in a transfer case, excuses the judge from being forced to give tax advice to the seller (now the judge is expressly allowed to inquire about tax issues of a guardian ad litem, if appointed, and the factoring company), and requires all attorney’s fees and costs to be paid by the factoring company. This is a very far stretch from the original bill, which would have been disastrous for West Virginians.
For more information on the West Virginia bill and my commentary on some of the political issues surrounding it, listen to my audio interview with Scott Drake of the Legal Broadcast Network by clicking here.
If you have any questions about what happened in West Virginia, or anything else relating to structured settlement factoring, feel free to contact me at mbracy@setcap.com