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:

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

 

The first part of this video interview is available now (below), with the second and third parts to come soon.

“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.

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.

• Mandating that a guardian ad litem be appointed for every prospective seller
• Changing the standard for approval from “best interests” to requiring clear and convincing evidence that the transfer is to avoid a financial hardship (and is in the seller’s best interest), and
• Imposing a rate cap for discount rates equal to the average mortgage rate for 20 year mortgages (the average rate is thought to be around 6%, but the state Banking Commissioner has indicated that they do not track that and don’t want to).

Contrary to John Darer’s position, in my opinion none of these would be good for tort victims. In fact, each prong of this proposed new law effectively shuts the courthouse doors on tort victims who will never have their chance to sell structured settlement payments when they need to. They are also just bad public policy. ALL sellers would have to have a guardian ad litem appointed, irrespective of their sophistication or understanding. For the non-lawyers who read this, a guardian ad litem is a court appointed person, usually a lawyer, who is supposed to essentially act as that person’s parent in the matter before the court. (“A guardian ad litem is a special guardian appointed by the court in which a particular litigation is pending to represent an infant, ward or unborn person in that particular litigation…” Black’s Law Dictionary, 6^th Ed.). How insulting to tort victims. Does being a tort victim mean you are not capable of making your own decisions? Or is it because you are a structured settlement recipient? What does that imply about structured settlement recipients? Sure, some tort victims are truly not capable of making financial decisions, and the courts of West Virginia, like courts everywhere, already have the inherent power to appoint guardians ad litem in those cases. But should it be mandatory for all sellers, irrespective of their individual status?

Only sellers needing money to avoid “financial hardship” would be able to sell future payments under the proposal. This is vastly different from the common “best interest” standard, and again would restrict which West Virginians would be able to even make it into the courtroom to tell their story. Is getting a new prosthetic leg “avoiding a financial hardship”? Probably not. How about being able to attend college or a trade school. Again, most likely not. Should structured settlement recipients be able to sell their asset, future payments, to do these things. Maybe. But under the proposed law, they would never get to make that case, under any circumstances.

The “rate cap” is probably the most clear evidence of what this bill is really about. If the rate is capped at 6%, then the structured settlement factoring market in West Virginia is closed. Period. All funding companies in this business must borrow money to use in funding. 6% is far below the rate at which we can borrow, so each transaction would start at a loss, and just get worse. Don’t forget, we would also need to pay the guardian ad litem, and the attorney bringing the action, not to mention covering our overhead, and making a reasonable profit. Under this proposal, we would never get to this level of analysis, because a large “Closed for Business” sign would be hung at the West Virginia border. Customers like “Mr. Smith” (real person, real West Virginian, fake name for this article), a retired Veteran, would not have been able to sell some of his future payments to buy an oxygen machine to help him breathe.

What is this bill really about? Delegate Walters, the key sponsor and a structured settlement broker, has made it very clear that this is really about putting the factoring companies out of business in West Virginia. His bill would do just that. If that is the goal, then let’s debate that issue directly and not dress it up in all this costuming, pretending to be “consumer protection”. But, if the factoring companies are out of business in West Virginia, then West Virginians with structured settlements are out of luck when they experience a life change, not anticipated at the settlement table. They will no longer enjoy the same financial freedom and flexibility as their neighbors in Virginia, Ohio or Pennsylvania.

HB 4380 is bad law and bad policy, and everyone, including the NSSTA and Mr. Darer, should oppose it.

John Darer, a structured settlement broker (that means he advises and helps people settle lawsuits and get into structured settlements), blogger extraordinaire and someone I admire has been engaging in a blog discussion about structured settlement brokers who accept referral fees for sending customers to factoring companies. This is an important discussion, and John has raised good points. However, intertwined in the dialogue and in some endorsements of John’s “clean vendor list” is the “factoring is evil” theme. The best example of this is Richard Halpern’s voiced support for eliminating factoring referrals, quoted by John in his December 13, 2007 posting. The discussion is whether structured settlement brokers should receive a referral fee for sending customers to factoring companies. John thinks not, as he sees this as “taking money out of the pockets of tort victims.” Mr. Halpern supports John’s position – or does he? “I applaud your call for all structured settlement brokers to sign your affidavit and to refrain from helping plaintiffs squander their money.” Mr. Halpern is apparently supporting a different plan, one that eliminates any referral to a factoring company at all – not simply refraining from taking a fee for doing so. That is clearly not what John is suggesting. Arguments about whether factoring leads to plaintiffs “squandering their money” should be considered independently and not mixed into this discussion.

I suggest that unless your “worldview” of factoring is clear, honest debates like this one can never go anywhere. Should factoring be abolished? If not, then at what level of involvement should various advisors be engaged? Who are these advisors? Several of John’s posts indicate that he thinks everyone who factors payments should be represented by an advisor. Who pays for that? Is there any difference between the payments that would need to go to such advisors and the payments to a broker who refers the business? They both would “take money out of the pockets of tort victims.” Is there a value being added, or otherwise a justification for the fee?

We’ve already said goodbye to 2007, let’s also say goodbye and good riddance to misinformation. Clear thinking and clear communication will help us all move our respective industries forward – beyond the misconceptions.

For more information on this topic and more, watch and/or listen to our latest video podcast.

It seems the world’s understanding of structured settlement factoring, and the intersecting world of structured settlements, is in disarray. Why are the basic facts constantly misstated, overstated, understated or not stated at all? How can you explain the enormous quantity of misinformation on the internet?

The large volume of “information” on the internet concerning structured settlement factoring is undoubtedly a function of the high cost of terms like “sell structured settlement” for sponsor ads on Google and such. With lots of money to be made on the internet by simply getting people to click on ads, nature takes over and you then have many, many internet sites featuring information on how to “sell your structured settlement”. Naturally there is no real regulation or screening, and much of what is written about factoring is garbage. The volume of misinformation is astounding, with new entries nearly daily.

I have discussed such misinformation in the past.  Another recent example is the “Ezine” article by Lance Winslow. Although Mr. Winslow has a very diverse background, and is a self-proclaimed Very Interesting Guy who traces his ancestry to the Mayflower, he knows little or nothing about structured settlements and factoring. For instance, Mr. Winslow’s short breezy article on structured settlement factoring states that you can use the money you generate from the factoring sale for "investing, buying a house or buying new car, plasma TV and other things humans want to make them happy.” I wonder if Mr. Winslow would like to come to court with me and explain how selling guaranteed, income tax-free payments and buying a plasma TV is in the “best interest” of the seller.

If you are involved in the structured settlement business, please take some time to educate yourself on what factoring really is, how it works and how courts influence the process and the underwriting.

One highlight of the conference was the presentation of NASP’s Alexander Hamilton Award to Congressman Eric Cantor of Virginia. Rep. Cantor is a leader in Congress as a key member of the House Ways & Means Committee, and also as Chief Deputy Republican Whip. Prior to his election to Congress, Rep. Cantor was in the Virginia House of Delegates where he was directly involved in early legislation regulating structured settlement factoring. After his election to Congress he was a co-sponsor of the legislation that became IRC 5891, the “federal structured settlement protection act.” In both instances Rep. Cantor was accessible, open-minded, fair and diligent in supporting private property rights while ensuring adequate safeguards against abuse.

If you would like any more information on NASP or the conference, please contact me at mbracy@setcap.com.

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.

Searching the internet the other day for “structured settlements” I ran across an article entitled “ Selling a Structured Settlement: It Could Cost You More Than You Know ,” by respected Massachusetts attorney Kenneth Kolpan. Sadly, this article contains many factual errors, at least in terms of what is happening today in the structured settlement factoring industry. Surely this article must have been written many years ago, yet it is undated so I can’t tell for sure. I tried to contact Mr. Kolpan to point out these inaccuracies, but have not heard back from him. His article is still up and is here: http://www.kolpan.com/lawyer-attorney-1145241.html. To clear the internet “record” so to speak, here is what I wrote to him on August 22, 2007:

Dear Mr. Kolpan:

I found your article today entitled "Selling a Structured Settlement: It Could Cost You More Than You Know" which is posted on your website. I found it interesting and generally well reasoned; however, there are some blaring inaccuracies, in my opinion. The article does not give a publication date, and it may well have been written some years ago, which would explain many of the inaccuracies I found. I urge you to consider the following points and to amend or rewrite your article.

Although your article is generally accurate about the history and mechanics of structured settlements, I found your characterization of factoring and the companies in this industry to be unjustifiably negative. You use statements like, "Persons in these situations [experiencing a sudden financial need] are at the mercy of companies (factoring companies) who use cash to buy the structured settlements." In a free and competitive market, it is difficult for me to imagine why a seller of structured settlement payments is "at the mercy" of a prospective buyer, and more than a home owner with a broken water heater is at the mercy of a plumber. There is a need and an available solution.

Other than negative references to factoring, your article also contains some factual inaccuracies, some of which may be due to being out of date. For instance, you make two references to alleged or suspected lack of disclosure to the seller of the essential terms of the sale. 47 states have adopted statutes governing the sale of structured settlement payment rights. The vast majority of these, including your state of Massachusetts, are based on a model act approved and promulgated by the National Conference of Insurance Legislators. This model act was the result of a cooperative effort between the structured settlement primary market of insurers and brokers and the factoring industry. Under the model act (and Massachusetts law, MGLA 231C, § 2(a)(2), for instance) a prospective seller of structured settlement payment rights must be given a disclosure statement prior to entering into the sales contract. This disclosure statement outlines the details of the transaction in statutorily prescribed fashion and language. Further, under the model act, Massachusetts law, and under federal law (IRC 5891), all structured settlement factoring transactions must be approved by a court. The crucial inquires for the court are whether the transfer statute (including the disclosure statement requirements) has been complied with, and whether the transfer is in the best interest of the seller, taking into account the welfare and support of any dependents.

Elsewhere in your article you question whether the cash purchase price paid to a seller would be nontaxable. 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).

Structured settlement factoring has come a long way since its inception in the late 1980s. I would welcome the chance to discuss this with you in more detail, or answer any questions you might have.

Sincerely,

Matt Bracy

For more information about this or any other topic relating to structured settlement factoring, feel free to contact me at mbracy@setcap.com.

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.

My name is Mike Green. I am outside counsel to several factoring companies. This is my first time posting to a blog so, please, be gentle.

Anyway, to follow up on Matt Bracy’s previous post about court approval, I thought I’d give my “outside counsel” perspective about court approval, what happens and how everyone can be prepared to face the judge at the hearing and what everyone can do to best present the transfer.

In most states (including PA and NJ, where I practice), an individual must appear in court and convince the judge that the proposed transfer is in that individual’s best interests.

While I can’t comment on procedures in each state, I can try to address generally what will happen. As the title of this post suggests, it’s important to be prepared for a structured settlement hearing.

Prior to the hearing, a document will have been filed with the court. It will vary by name from state to state but will likely set forth the terms of the agreement and it may attach the sale agreement between the parties and the Disclosure Statement as exhibits.

After filing, the matter is generally assigned to a judge. Judges’ procedures often vary widely. Some judges schedule each structured settlement transfer hearing they receive separately. Some judges schedule all structured settlement transfers on the same date and time. Some judges lump these transactions in with a variety of other matters and tell everyone to get there at the same time. Some judges run on time. Some do not. It is often difficult to know how matters will proceed until everyone is in the courtroom.

I generally like to meet with my clients’ customers outside the assigned courtroom about a half hour before the scheduled hearing. We go over the paperwork, address any issues which may have come up and prepare for the questions that I or the judge will ask at the hearing.

Sometimes people will ask me “What do I say?” or “What do I need to tell the judge to get this approved?”

First, there’s no magic thing to say (other than the truth, of course).

Second, it’s important to remember that the judge is king (or queen) in these transactions. One way to help prove to the judge this is in your best interest is to be prepared – if you intend to use a lump sum to pay off higher interest credit card bills, bring them to court. If you intend to use the lump sum as a down payment on a house and you are pre-approved assuming you get the lump sum, bring that documentation. If you have other needs or if you have other circumstances which might appear odd to the judge, be ready to address them.

Judges differ in their approach to hearing the transfers. Some judges ask questions. Some judges have the attorneys ask questions. Some judges permit the attorney and the individual seeking to make the transfer to sit at the same table. Some do not. Some judges require the individual to give testimony from the witness chair. Some do not.

That said, while there are many differences between judges and their procedures at these hearings, certain things remain the same. Judges take their responsibilities seriously. While you may not think that a judge should be able to stop a grown man or woman from entering an arms length financial transaction with someone else, state legislatures around the country have required that a judge approve the transfer of any structured settlement payment rights. Since that is the law, people who are serious about entering into these transactions and who want these transfers approved should act accordingly. Judges are much more likely to approve structured settlement transfers when they see that the law’s requirements have been met and the seller is prepared and serious about the transaction.

Kirk D. Hughes, Director of Production Operations, for SCC said: "The website is crucial in getting educational information out to the public and professionals regarding the structured settlement factoring industry. The new-look site, has new content which is easier to navigate and quicker to access making it very user friendly.”

The new website is part of SCC’s continuing leadership in education and information on structured settlement factoring and related services. We have also dedicated a page on our site that provides individuals a list of structured settlement companies that establish structured settlements for injury victims. (If you are a structured settlement professional and you would like us to link to your company, we will gladly add you to the list. We do not require you to link back to us as we are doing this for the consumer’s best interest, not ours. Click here to contact us.) Consumers can also find information on the various trade associations such as the National Association of Settlement Purchasers (NASP), National Structured Settlement Trade Association (NSSTA) and Society of Settlement Planners (SSP).

We encourage you to visit the new site and welcome any feedback you have to offer.