As George Orwell implies in his famous essay “Politics and the English Language,” words used to describe things affect a kind of control over the things they describe. Language forms the basis of thought, since we think in words. Unless something can be named, we have difficulty holding it in our minds. The opposite can also be true: If a name of something becomes meaningless, the concept can be lost. “Since you don’t know what Fascism is, how can you struggle against Fascism?” notes Orwell. Often this use of language is purposeful and “political” (as in motivated by self-serving or partisan objectives). “Political language … is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind.” It should be no surprise that word choice is linked to shading of the spin. Simply consider the various words available to describe the same person in the news today: Is he a “suicide bomber” a “homicide bomber” a “freedom fighter” or an “insurgent”? Each of these ways to characterize the same person is carefully chosen and filled with significance, and usually reflective of a particular perspective and agenda.

What on earth does any of this have to do with structured settlement factoring? As we have discussed several times in the past, the terminology used to describe this business can be misleading – purposefully misleading. Here are some examples:

1. Structured settlements are being “undone” by factoring:

This is not true. The structured settlement itself and the funding annuity are essentially left intact when a person elects to sell future payments. Further, and more to the point, the vast majority of factoring transactions only involve the sale of some of the future payments, with the remaining unsold payments continuing to go to the annuitant. “Undone” also connotes a retroactivity that very clearly does not come from a factoring transaction, but is the boogeyman of “negative tax consequences” from days gone by. Characterizing the factoring process as “undoing” a structured settlement casts the factoring industry against the primary structured settlement industry. That war has ended, although I suspect some long for the “good old days” and the fight. As with any who glamorize war, they are not the ones who were bloodied. True veterans of the factoring wars do not wish their return, and fashioned a workable peace that provides the framework for the factoring business today.

2. Factoring subjects the seller to “deep discounts”:

Vague and subjective terms like “deep” are subject to great interpretive variance. What may be a “deep” and unacceptable discount for some may be just fine for another. Most factoring discount rates today are in the 10-15% range. Is that “deep”? Yes, some are higher (and some are lower). Shorter term payment streams, where payments are close in time to the purchase, necessarily require a higher interest rate. Why? Think of it this way: If you took out a loan for $1,000, and the interest rate was 10% APR, but the loan was due in 6 months, the interest due at that time would be $51.05. Interest is the amount of money a lender makes from allowing you to use their money. From that amount, the lender needs to pay all overhead (salaries, leases, office equipment, etc.) and presumably make a profit. It is hard to imagine covering the expenses of the loan, let alone making a profit, from the $51.05 in interest in my example. Obviously, as time goes on the interest adds up, until it reaches a point where the profit justifies the transaction. Similarly, if a structured settlement payment or payment stream is due relatively soon, then the discount rate (analogous to the interest rate in the above example) must be high enough to produce enough profit to make the purchase worthwhile. The other factor prevalent in both examples is the lender’s or factoring company’s cost of funds. Factoring companies must borrow money to do business, like most other financial services companies.

3. Calculating factoring “deep discounts” … with bad math:

Concluding that there was a “deep discount” can often come from using bad math. Too commonly, a discount percentage is calculated by simply dividing the purchase price by the aggregate value of the future payments being sold. This “simple” calculation completely misses the most important element: The time value of money. A dollar in 20 years is not worth as much as a dollar today. By ignoring the time value of money, such calculations border on the ludicrous. Most unfortunately, the mathematically challenged who engage in this type of flawed analysis are sometimes judges.

4. Structured settlement annuitants are “irrational” “ignorant” or otherwise not able to care for themselves:

I find this mischaracterization the most enraging. It doesn’t take a very discerning eye to notice that when opponents of the factoring industry attack, often it is the seller/annuitant/former plaintiff that is pilloried. In court documents, legislative hearings, and blog and print articles, sellers of future payment rights are denigrated as incompetent imbeciles barely able to function in adult society. Here are some actual examples of how these annuitants are described:

“… factoring companies often charged sharp discounts to payees who were ill equipped to appreciate the value of their future payments or to understand the onerous terms of factoring agreements.”

“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 an injured person at a time when they need cash.”

“…it is estimated that more than half of the claimants squander their award themselves or lose it to family, friends, and the unscrupulous or even well-intentioned advisors…”

“About 90% of lump-sum recipients exhaust their awards within 5 years.”

Some of these statements were addressed in the only independent in-depth scholarly work on structured settlement factoring, Professor Adam Scales’s 2002 law review article, “Against Factoring? The Market in Tort Claims Has Arrived.” Prof. Scales notes the “generous helping of skepticism directed toward the habits of tort plaintiffs” which underlies many of these assumptions. “An essential element of the discussion has been the assumption that successful tort claimants simply cannot be trusted with large sums of money,” Scales writes. Most striking is Prof. Scales’s conclusion that these attacks against the annuitant are unfounded or, at best, not supported by any credible, relevant studies or evidence.

Portraying the structured settlement recipient as an incompetent boob has political and financial motivations. If you believe the charge, then surely someone must look after these poor wretches. To the rescue ride the many advisors and consultants who surely know better than the annuitant how they should spend their money. I am certainly not against advice, legal, financial or otherwise, but I am put-off by mischaracterizations and insults used to justify their functionality. The disingenuity of this tactic is brought to light when you consider that this “poor and inept” annuitant was once a tort plaintiff, who may or may not have been represented by counsel or a financial advisor when settling the tort claim (there is no requirement), and who typically did sign off on the settlement agreement resolving the dispute (usually without any judicial oversight). Alas, these poor folks must lose much competence from the settlement table to the factoring contract…

5. Structured Settlement factoring is an “impulse buy”:

Kirk Hughes has recently written on this, so I won’t belabor the point. I will point out that it is indeed difficult to imagine an “impulse buy” that involves (on average) a 3 month process, careful underwriting, a court appearance and “best interest” scrutiny.

In conclusion, I would simply and humbly suggest that persons interested in structured settlements, including factoring, guard against easy catch-phrasing and loosely reasoned terminology that forestall honest intellectual consideration. Rather, as Orwell suggests, send these phrases to the dustbin where they belong.

As always, we welcome comments on this article, or inquires regarding structured settlement factoring.  You may contact me at mbracy@setcap.com, or by telephone at 800-959-0006.