In another example of how outdated or inaccurate information manages to stick around on the internet, I recently found an on-line article called, “Selling Your Structured Settlement.” This article is part of “ExpertLaw”, which purports to be an on-line expert witness source and also contains a sort of general “legal encyclopedia” of articles on various subjects.

Like the article I wrote about in my last post, unfortunately the author of this piece, Aaron Larsen, Esq. of Michigan, has not bothered to keep it up to date. Unlike the last article however, “Selling Your Structured Settlement” does contain a publication date (April, 2005). As much as I would like to give Mr. Larsen the benefit of the doubt, I’m afraid much of the misinformation contained in the article was as incorrect in 2005 as it is today.

I wrote to Mr. Larsen last month, pointing out that his article was “out of date” (at least) and offered to help him correct it. He has not taken me up on the offer, and as of today the article is still posted. In another attempt to clear the record, here are the points Mr. Larsen’s article has wrong:

1. “The best time to decide that a structured settlement is not right for you is before you consent to such a settlement.”

This is actually sound advice. However, it ignores the reality of structured settlements and factoring. In my experience and opinion, most structured settlements are entered into for good, well-thought out reasons. The structured settlement brokers and legal professionals who advise the personal injury plaintiff typically do a fine job of explaining the advantages and mechanics of a structured settlement. What most often prompts a person to seek to sell future payments, however, is not poor planning at the outset, but rather the occurrence of an unforeseen event. Most structured settlement factoring customers have experienced an unanticipated change in circumstances after the settlement is finalized. Structured settlement factoring provides flexibility when something unexpected comes up, like an illness in the family, the need for different housing or transportation, or the chance to buy a house or business. (See my earlier article entitled "The Need for Liquidity Options" for more on this).

2. “There are laws in approximately two thirds of the states which restrict the sale of structured settlements…”

Actually, there are currently structured settlement transfer laws in 46 states (92 percent) – far more than 2/3 (click here for a chart of all the states' transfer laws).  Most of the laws (36) are based in whole or in substantial part on the model state law developed and approved by the National Conference of Insurance Legislators (NCOIL). Another 3 state laws pre-date the NCOIL model act, but are substantially the same as it.

3. “…and additional federal regulations apply to the sale of structured settlements.”

Almost got it right here. It’s actually a federal law (as in statute), not a regulation, found at 26 USC § 5891. Passed by Congress in 2001 and signed into law in 2002, the federal structured settlement protection act effectively governs all structured settlement factoring transactions. On its face it appears as simply a federal excise tax provision. You may choose to engage in a factoring transaction according to its terms or not, but if you do not, then an excise tax will be assessed. However, the innocuous wording of the statute belies the global effect it has, based on the severity of the excise tax itself. The excise tax under IRC 5891 is extremely punitive, rendering its provisions effectively mandatory.

IRC 5891 imposes a straightforward requirement on each factoring transaction: That it is approved under a “qualified order” by an “applicable state court” under an “applicable state statute”. Each of these terms has a specific meaning under the statute.

“Qualified Order” means an order or judgment from an “applicable state court” under the authority of an “applicable state statute” finding that the (1) transfer does not contravene any federal or state statute or order of any court or responsible administrative authority, and (2) the transfer is in the best interest of the annuitant/seller, taking into account the welfare and support of the payee’s dependents.

“Applicable State Court” means a state court in the state where the “applicable state statute has been enacted, or under some circumstances, the state where the annuitant/seller is domiciled.

“Applicable State Statute” means a state statute that governs the structured settlement transfer process in the state where the annuitant/seller is domiciled or, if none, then the state where either a party to the structured settlement or the insurance company that issues the annuity is domiciled.

4. “The insurance company that issued the annuities for the structured settlement may refuse to cooperate with the sale of a settlement, citing policy language and asserting that payments cannot be assigned.”

First, not to be too nit-picky, but it is not the sale of a “settlement” that occurs in a structured settlement factoring transaction. Rather, it is a “transfer of structured settlement payment rights” (see IRC 5891(c)(3)). While it is true that some insurance companies object to transfers, for a variety of reasons, it is not true as implied that such an objection somehow affects a veto of the transfer (except in Maine, which unfortunately does provide for such a veto). In the rest of the states, the judge will decide whether the transfer should be approved. For more information on antiassignment clauses in structured settlements, see my earlier post "Why You Can Assign Even When It Says You Can't".

5. “…there can be significant tax consequences associated with selling part or all of a settlement. It may be that, while payments made under the settlement were not taxed, the lump sum received through the sale of the settlement will be taxed.”

This is a whopper, and probably deserves its own article (which I hope to entitle “Don’t Mess with Taxes”). The purchase price paid to an annuitant/seller in a structured settlement factoring transaction is not taxable. As I mention in my last post, Old News:

It has been clear since at least 2002 with the passage of the federal Structured Settlement Factoring law that factoring purchase price payments to personal injury annuitants are not taxable. (IRC 5891(d)(1); see also Private Letter Ruling 1999-36030).

There seems to be an overabundance of incorrect information out there on structured settlements and factoring.  Consumers and advisors need to be very cautious about where they educate themselves on these issues, and, as always, question the source.  Since drafting this post I have already found more examples of misinformation posted by purported "experts".  It looks like this will be a continuing blog theme, sadly. 

For more information about structured settlement factoring and related issues, please contact me at mbracy@setcap.com or by phone at 800-959-0006.

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.