The Dissipation Myth

Law student Jeremy Babener has written an interesting article questioning the basis for the oft-“cited” statistics concerning personal injury plaintiffs “squandering” settlements. As Mr. Babener points out, for a very long time proponents have justified structured settlement’s tax subsidy, and opposed structured settlement factoring, by pointing to the statistic that “90% of personal injury claimants spend their entire payment within 5 years of receipt.” However, it turns out that there is no demonstrable foundation for this “statistic”. It appears to have been just made up. Indeed, as Mark Twain noted, “There are three kinds of lies: lies, damned lies, and statistics."

Structured settlement commentators Patrick Hindert and John Darer have recently commented on Mr. Babener's piece, and I commend their articles to you.  I have a different perspective. 

I find it significant that a fictional statistic has been used for so long by so many. To what end? The clear purpose is to bolster the image of the personal injury claimant as incompetent, unable to care for himself, and obviously unable to make “sophisticated” financial decisions. Therefore, the argument goes, the perfect financial solution is a periodic stream of payments that they cannot alter. This is the rhetoric used to sell structured settlements for years. The argument also highlights why the primary structured settlement brokers are so viscerally opposed to factoring -- it’s really about marketing. If the structured settlement brokers were selling their product to the personal injury claimants, they would embrace the factoring world as the “after market” solution allowing some flexibility in an otherwise inflexible product (much akin to a consumer having the means to resell a car down the road). But, the predominant real market for structured settlement brokers is insurance companies and trial lawyers. To that market, the concept of the incompetent claimant plays well.

The logic of the dissipation myth, at least as a sales tool for structured settlements, is likewise flawed. If a payee is disposed to blow through all his money, does it really matter if it comes in monthly amounts or a factored purchase price? Moreover, many if not most of the structured settlements that I have seen in my 10 years in the business have included lump sum payments. In other words, the structured settlement itself may be set up to pay large lump sums annually, or once every 5 years, etc. These lumps may be in addition to monthly payments, or not. How does that interplay with the dissipation propaganda? Does the check from the insurance company have magical “anti-dissipation” properties that the factoring company check does not?

Structured settlements are a wonderful tool to settle claims. In most cases the payment stream works just fine, particularly when talking about the catastrophically injured (the factoring industry unscientific estimate is that only about 5% of structured settlement recipients ever factor).  However, structures are not spend-thrift trusts, they are not guardianships. Overselling them as such has led to problems and logical inconsistencies.

Do some people get a lump sum of money, either at settlement or via factoring future structured settlement payments, and “blow it”? Sure, just as some people get a paycheck on Friday and it’s gone on Monday.  Its the "solution" to this problem, if there is one, that can lead down an unattractive path.  Paternalism is a dangerous thing, and a difficult genie to put back in the bottle.

By Matt Bracy, General Counsel, Settlement Capital Corporation.  I welcome your comments or questions about this article or structured settlement factoring in general.  You may post comments here, or contact me at mbracy@setcap.com.