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How to Get Out of a Structured Settlement

Structured settlements were originally designed to help accident victims, among others, but they can be a trap for many people. Such vehicles can be a trap because of their nature and inherent limitations.

In a structured settlement, a victim agrees to dismiss a lawsuit or an insurance claim in exchange for an annuity. The annuity is a contract in which an insurance company agrees to make payments of a specific amount to a certain individual for a set period of time. In some cases, annuities can be a pretty good deal because they provide a guaranteed income without increasing a person’s tax liabilities.

The problem with structured settlement annuities is the limited amount of income that they provide. Many victims find out that they simply cannot live on the small amount of money provided. Others discover that the amount added to their monthly income is tiny.

Yet the individual is trapped into accepting the payments because he or she signed a contract. The contract obligates the insurance company to make the payments, but it also obligates the recipient or annuitant to keep receiving them. This trap can put a person or a family in a very shaky financial situation.

How a Structured Settlement Factoring Transaction Can Help

Yet there is a way out of this trap, called a structured settlement factoring transaction. In such a transaction, a company, called a factor, buys the structured settlement annuity for cash and sells it to an investor. Such a transaction is possible if the structured settlement agreement gives the recipient the right to transfer ownership.

The seller will lose the tax benefits and guaranteed income from the settlement, but he or she will gain a lump sum of cash. The tax benefits are not as great as some people think because they are on money the recipient never really has possession of. The funds are in the hands of the insurance company, and only a small amount is doled out in the form of a payment each month.

Not only will the recipient be freed of the obligations of the settlement, he or she will usually have a sum of cash. The cash is more flexible, and it can be used to cover emergency expenses or pay off debts. Unlike some annuities, it can also be left to heirs in a will.

There are some obvious drawbacks to this arrangement; the recipient’s tax liability may increase because of higher income. The guaranteed income is also gone for good because the annuity has been sold.

How to Get Out of a Structured Settlement

A structured settlement factoring transaction makes it possible to get out of a structured settlement agreement. A person can take advantage of such a transaction under two circumstances:

 

  • The structured settlement agreement gives the victim the right to sell the annuity. Not every agreement offers this, so the recipient will need to read the agreement to see if it is possible. In some cases, the recipient may have to consult with an attorney to see if this is possible.

 

  • The law in the state where the recipient lives allows such transactions. The laws of some states do ban such transactions. An annuitant can find out if such transactions are legal in his or her state by consulting with a structured settlement buyer or factor.

 

The good news is that most recipients of structured settlements fall into these categories. The courts made such agreements flexible enough to sell because the attorneys involved realized that circumstances change. They deliberately built a loop hole into most structured-settlement contracts that most recipients can take advantage of.

Selling a Structured Settlement

The first and most obvious step in the sale of a structured settlement is to determine if it can be sold. If the settlement annuity can be sold, the seller will usually find a wide variety of options.

The number of structured settlements skyrocketed over the past thirty years because of the explosion in personal injury litigation. Insurance companies and others adopted structured settlements as a mechanism for reducing the potential costs of lawsuits.

This meant that large numbers of people found themselves with such settlements, and many of them did not realize what they were getting themselves into. These people began selling the agreements to sellers or buyers.

At the same time many investors realized that structured settlement annuities were actually a good investment. The buyers like this kind of annuity because it offers a guaranteed return, small tax liabilities (only the payments are taxable), and a fairly high rate of interest (around 7%). Since structured settlement annuities are guaranteed by major insurance companies such as Met Life, they are highly secure investments.

When an investor is able to purchase several of them for cash, such annuities can be a very good deal. Investors can live with the payments because they are usually affluent professionals that have several different sources of income. The settlement payments are just another stream of income.

Unlike a working class family, such a professional can often afford the limitations associated with such agreements. Many of the working people that found themselves stuck with structured settlements could not. On the other hand, they could use the cash from the sale of such agreements.

This led to a large market in these investments. Today a person that wants to get rid of a structured settlement is extremely easy because there are hundreds of factors willing to pay top dollar for it online. It can be converted into cash in just a few days and the cash placed in the seller’s bank account via direct deposit as soon as it becomes available.

That means a person can have several thousand dollars or tens of thousands of dollars in cash in the bank instead of a payment of a few hundred dollars. That money can often make the difference between such catastrophes as foreclosure or repossession of a car for a working family.

Yes, structured settlements can be a trap for working families, but it is easier than ever to get out of that trap. No working family needs to live with small payments when a structured settlement factoring transaction might get it a large sum of cash.