FAQs About Secondary Market Transfers
Here are answers to some of the most frequently asked questions about the secondary market for structured settlements.
Q: Do most people receiving structured settlement payments sell their future payments?
No, most people receive payments according to the original schedule. In our experience, less than 15% of structured settlement recipients ever complete a secondary market transaction.
Q: I thought structured settlement payments were used to protect people who are seriously injured, can’t work, and depend on those payments for their income. Won’t selling those payments leave them without any financial support?
Structured settlements are used in all kinds of lawsuits, not just those involving serious injuries. Most people who want to transfer part of their structured settlement don’t depend on those payments for all of their monthly income.
Even people who can’t work often want to sell a part of their future payment rights. For example, a man who uses a wheelchair because of a train accident might receive a monthly payment of $6,000. The secondary market will give him the flexibility to transfer $750 per month for 60 months so he can buy a wheelchair-accessible van to make it easier to get around.
Q: What laws govern the secondary market?
In 2001 NASP and other industry leaders wrote a Model State Structured Settlement Protection Act. Today, 47 states have passed settlement transfer laws requiring disclosures and court approval of structured settlement transfers. In 2002, a federal law extended the tax-free nature of future payments to lump-sum payouts made in a sale in the secondary market. These state and federal laws provide a firm regulatory foundation to the secondary market. Find out what the law is in your state.
Q: Why can’t I just use my structured settlements as collateral for a bank loan?
That is an option if you have good credit and are willing to take on additional debt.
Unfortunately, few banks will take your payments as collateral. That is because even using your payments as collateral is considered a transfer that must be approved by a judge. Banks typically don’t want to go to the expense and inconvenience of getting court approval just to issue a loan. What’s more, a company that purchases or loans against structured settlement payments must agree to take on certain obligations from the insurance company. These include certain fees and agreeing to pay for the insurance companies’ litigation expenses if there is ever a lawsuit relating to the transaction (called an indemnity). Most banks are unwilling to take on these obligations.
Q: Is it a bad idea to sell my future structured settlement payments?
Not if you know what you are doing, why you are doing it, and get good advice from a professional. You understand your financial, personal, and family circumstances and situation than anyone else. You have the added security of knowing that a judge will review the transaction and protect you from being taken advantage of.
Q: Do I have to transfer all of my future payments?
No, it is very rare for payees to transfer tall of their future payments. More than 97% of secondary market transactions involve the sale of only part of a payee’s future payment rights. Most payees transfer only as much as they need to take care of changes in their circumstances—a divorce or home foreclosure, for example—or to achieve a specific goal—like a down payment on a house or tuition payments.
Q: Will I have to pay a high discount rate to get money now for future payments?
You will pay a discount rate between 12 to 22%, on average. Your exact rate depends on a number of factors, such as where you live, the length of your structured settlement, and the amount you want to transfer.
Q: Does the secondary market make structured settlements less useful as a tool in settling lawsuits?
To the contrary, the secondary market supports the usefulness of structured settlements. It does this by making sure payees have the flexibility to respond to changes in their financial or personal circumstances. Giving people the option to sell increases the value of a structured settlement. Transfer statutes and the requirement of court approval ensure that structured settlement payment rights will not be transferred without judicial oversight.
Q: Aren’t these sales just a way for funding companies to make high, risk-free profits?
The profits are neither high nor risk-free.
It takes the funding company time and money to prepare the transaction for review by a judge. If the judge does not approve the transaction, the funding company doesn’t make a profit, it actually loses money. This gives funding companies a strong incentive to present the best possible transaction to the court for approval.