A structured settlement is drawn up when someone is entitled to receive a large sum of money and either chooses to receive it in monthly installments or receives it that way because the party obligated to make the payment cannot pay the large amount as a lump sum. For example, if a company is found to be negligent, and therefore liable for a customer’s injury, and is required to pay $20 million, a possible structured settlement might be for the company to pay $83,333 per month for 20 years instead of $20 million all at once. In most cases, however, the sums involved are much smaller.
According to the Internal Revenue Service, transferring the proceeds from a structured settlement to another party used to be disallowed. For this reason, beginning in the 1990s, companies began a process called factoring. Factoring involved a “back-door” method of getting around the law regarding the transference of structured settlements to a different party. In reality, the person receiving the structured settlement would continue to receive the settlement as usual. The company, however, would enter into a contract with that person whereby the person would sign over the proceeds of the settlement to the company. This transference might take the form of re-endorsed checks or preset electronic transfers. For giving up the proceeds of the structured settlement, the person would receive a lump sum in lieu of the regular payments.
Although some factoring companies were legitimate enterprises with solid business ethics, many such companies immediately began gouging customers. They would conduct business in states with lax usury laws, fashion convoluted contracts that hid from customers the fact that they were being charged an annual interest rate of 70 percent just to get that lump sum, and other nefarious business practices. These contracts would also contain complex jargon that boiled down to: If you miss sending us a payment, we can sue you for the amount missed and also the lump sum we gave you.
Because these fly-by-night companies were as predatory as they were, both federal and state agencies and legislatures enacted new laws to control such dishonest practices. For example, getting a lump sum in lieu of a structured settlement is no longer, “just a phone call away!” Now, that first phone call simply starts a lengthy, well-controlled process that includes the discretion of a judge.
Furthermore, the person wanting to get a lump sum is not allowed to get such a lump sum for just any reason. The person must be able to provide documentation of a legitimate and pressing need for the lump sum before a judge will even consider a transfer. Most states also require that the transfer must be in the best interests of the person seeking it no matter the ostensible reason he or she is seeking it. In short, you can’t just get the lump sum because you want to go live on the Riviera for a few months.
Generally, the entity purchasing the structured settlement and providing the lump sum will also charge a discount rate that is similar to the interest rate charged on a loan. For example, if John Q. Public wants a $50,000 lump sum payment instead of his $250 per month structured settlement, and the company providing it to him charged a discount rate of 12 percent, John would receive $50,000 minus 12 percent per year for the duration of the structured settlement.
In all cases, the aforementioned judge is the final arbiter. No matter the devised contracts, settlements, agreements, or any other documentation, the judge can simply say no if he or she feels that is warranted.