The short answer to this question is, ‘yes’, but there are some very important points to be aware of, should you be considering this step. Although you may not use your structured settlement payments as collateral for a loan (this would directly conflict with the tax-free nature of your periodic payments), it is possible for you to enter into a transaction with a purchaser. A structured settlement buyer is a financing company that offers a lump sum of money in exchange for some or all of the claimant’s future payments.

This can seem very attractive when there is a change of circumstance for the recipient of the structured settlement. Perhaps there is a crisis in the family, or a child is going to college, or another family member has become ill. Suddenly, the thought of having a large sum of money is highly tempting.

The first thing someone in that situation should know, is that they are not going to get anything even close to the remaining value of their settlement payments. Many clients come away with 50%, or even less. Knowing this upfront can prevent confusion, disappointment and heartache.

The second vital piece of information for a potential seller, is that there are solid, reputable structured settlement funding providers, and there are also fly-by-night, unscrupulous firms that actively exploit people in their hour of need. 47 states and the federal government have enacted stringent structured settlement protection statutes to police these ‘structured settlement factoring transactions’. Nevertheless, it is still up to you to protect yourself. Federal law requires court oversight and approval for any injury victims who decide to sell structured settlement payments to a third-party entity. Knowing that simple fact is the first step to making sure you don’t fall prey to cutthroat frauds.

For a start, do your homework, and assure yourself that the business that is quoting you has a squeaky clean reputation. Check them out online, and through consumer forums. Pay attention to their attitude from the very first contact. Are they patient and willing to explain every step to you in detail? Reputable finance houses make their money from the actual deal, and have no need to confuse their clients. On the contrary, a good service provider will suggest that you consult an attorney, and will make every effort to educate you thoroughly regarding your options, the process, and the expected outcomes.

Once you’ve made contact, and you’re satisfied that the structured settlement buyer is experienced and professional, then you will request a quote. At this point, they will evaluate your structured settlement, and determine precisely which offer they are willing to make, on what terms. This is the time to be clear as to your needs. Perhaps you wish to retain some payments in the future, and only sell a portion of the structured settlement payments. The buyer will discuss the options available to you, and help you to decide on your personal course of action. At this point, you are free to change your mind and stop the process, and indeed, some clients choose not to accept the lump sum offered. This is a big decision that must be weighed carefully. Get all the good advice that you can, perhaps from your attorney, or possibly the state attorney that originally handled your structured settlement. And talk to a trusted family member or friend who is not personally invested in the financial outcome of your decision, someone who will not directly benefit from your pay-out. Sadly, dollar signs in the eyes can temporarily cloud even a loved one’s vision, so be careful whom you listen to.

If you choose to accept the offer, you will now have to sign the relevant documentation, which must also be notarized and returned to the structured settlement funding provider. Having signed, you are now legally bound by the terms of this new contract. The buying company proceeds to setting a court date with a local attorney from your area, and verifies payments with the insurance company that is responsible for your periodic payments.

It’s now a waiting game, until the court approval comes through. How long this takes varies from state to state, and sometimes there are unexpected delays, so don’t set your heart on a particular date. In general, though, the entire process takes from 3 to 8 weeks, after which the structured settlement buyer (in possession of the court approval) releases the agreed funds to the client. With that, the transaction is complete, and it is not possible for you to change your mind and try to get your payments back at some future point, if all the legal steps have been correctly adhered to.

No-one would deny that swopping monthly periodic payments for a lump sum can be the right solution for many people. However, the important thing is that you make sure that this really is the right solution for you and your family, and that you understand that the decision is irrevocable.

Negotiating the complex process of selling structured settlement payments is a serious matter. You need to be sure that the company you’re working with is reputable and experienced, and with that in mind, we’re taking a look at five of America’s biggest buyers.

1. Stone Street Capital

Stone Street Capital, with headquarters in Maryland, has been operating since 1989. A pioneer of the structured settlement funding service industry, they have achieved an enviable A+ Better Business Bureau rating.  Their website delivers a very high standard of informative content, an excellent resource for the consumer looking to better understand the structured settlement buyer.

What to expect at Stone Street Capital:

-       First, you determine how much money you require, and when you’re likely to need it.

-       Discuss the various options available to you with Stone Street

-       Should you accept their offer, the relevant paperwork is couriered to you overnight for your signature, and notarization.

-       You return the papers

-       Stone Street verifies payments, and sets a court date locally.

-       Stone Street will either send a wire transfer or verify the status of court approval.

-       Depending on where you live, the entire process takes from 45 to 90 days.

2. JG Wentworth

In business since 1992, this Pennsylvania company currently holds an A+ rating with the Better Business Bureau. JG Wentworth is one of the biggest structured settlement companies, with a solid reputation.

The process at JG Wentworth includes:

-       Call or submit your request online, and then complete the required documentation.

-       Return the signed papers to JG Wentworth.

-       Having received the documents, they will offer the client a lump sum in exchange for part or all of the future periodic payments.

-       JG Wentworth’s attorney files the documents for court approval.

-       After 4 – 6 weeks (in most states), court approval is received, and the client receives their check.

Though their customer service is not the friendliest, JG Wentworth’s strong reputation gives the client peace of mind, and ensures smooth and professional processing.

3. CBC Settlement Funding

Also doing business in Pennsylvania, is CBC Settlement Funding. CBC’s top executives have worked for some of the largest structured settlement companies, and have used that experience to build a well-organized firm with solid customer service values. We found their website to be markedly better than those of more established players in the industry, and their high level of professionalism is immediately apparent.

At CBC Settlement Funding, the structured settlement client can expect:

-       An initial contact with CBC to talk through their options.

-       The required documentation is sent for signing and notarization.

-       Paperwork is returned to CBC Settlement Funding.

-       Along with the insurer, CBC works to verify payments and set a court date with an attorney where you live.

-       Upon court approval, CBC will issue a wire transfer or check to the client.

-       CBC quotes a turnaround time of between 3 and 6 weeks, depending on where you live.

If you’re looking to turn your structured settlement turned into a lump sum payment, then excellent customer service makes CBC Settlement Funding a good choice to request a quote from.

4. Woodbridge Structured Funding

Based in California since 1993, Woodbridge Structured Funding holds an A- rating from the BBB. We can’t say we were impressed with the strong sales message on their website, something we felt was inappropriate when dealing with clients who face immensely important financial decisions that require financial education. Although the basic Woodbridge process was not mentioned on the site, we established that this is roughly what a client can expect from their service:

-       Start by calling a representative.

-       Woodbridge evaluates the structured settlement and makes you an offer.

-       On your acceptance of the quote, you’re sent an overnight package with the paperwork that you need to fill out.

-       Your payments are verified by the insurance company and Woodbridge.

-       Upon verification, an attorney is hired, and application is made for a court date in your local area.

-       In general, allowing for delays in getting court dates, and different state requirements, most clients can expect their settlement check after 45 days.

In Woodbridge Structured Funding’s favor, we were very impressed with their customer service. Still, we feel they should lose the ‘free stuff’ gimmicks, and focus a little more on educating their clients upfront. Overall, it’s worth getting a free structured settlement quote from them, but don’t be distracted by fancy promises and useless gifts.

5. Settlement Capital Corporation

Founded in 1988, this Texas structured settlement financing company specialises in providing lump sum pay-outs to settlement holders. Though they hold an impressive A+ BBB rating, this Dallas company failed to make a good first impression, simply because their website was disappointingly underdeveloped and without useful information of any kind.

At Settlement Capital Corporation, the process clients follow is:

-       Make that first call to a representative.

-       Settlement Capital Corporation evaluates the structured settlement and leads you through your planning options.

-       Having chosen a plan, the client then receives the relevant contracts for signing and notarization.

-       When the signed documents are returned to Settlement Cap, the company then verifies the client’s payments with the insurer and application is made for a court date.

-       Clients can expect to wait 45 to 90 days for their check, depending on which state they live in and the insurance company they’re working with.

-       Once the order has been approved, it takes from 5 to 10 days for funds to be received.

Although Settlement Capital Corporation has many years of experience, we felt they lacked an understanding of modern communication and were less than forthcoming with useful information.

Most structured settlements follow a similar process, and are generally structured according to the following guidelines: To begin with, the claimant (the injury victim) and the defendant (or possibly the defendant’s insurance provider) settle a tort suit. Such a settlement agreement stipulates that the injured party will drop the lawsuit against the defendant, in exchange for a series of periodic payments, made over time from either the defendant or, as is usually the case, the defendant’s insurer. This means that the defendant, or the property/casualty insurer, now has a very lengthy financial obligation to the successful claimant.

In order to meet these payment obligations, the insurance company will usually proceed along one of two paths. The first option is for the insurer to buy an annuity from a life insurance company. This arrangement is known as a ‘buy and hold’ case. The other option is an ‘assigned case’, where the insurance company chooses to delegate its periodic payment obligation to a third-party company. In order to fund the assigned periodic payments, the third party now purchases what is known as a ‘qualified funding asset’. According to IRC 130(d), the qualified funding asset may be either an annuity (by far the most common choice) or else an obligation of the United States government, i.e. United States Treasuries.

In unassigned cases, it is the defendant (or their insurer) who buys a life insurance annuity, retaining the periodic payment obligation, and paying out the claimant themselves over time. The annuity becomes an asset that matches the periodic payment obligation, and therefore offsets it. This matching process means that the payment stream purchased by the annuity matches the original agreement in every respect, so that the claimant receives payments strictly according to the timing and amounts that were agreed in the structured settlement.

The annuity is owned by the defendant (or the insurer), and the victim is named as the payee under the annuity. The annuity issuer is directed to send all payments directly to the claimant. If the structured settlement is linked to the lifetime of the claimant, then the claimant (or anyone else who may have been designated the measuring life) is pronounced to be the measuring life (the annuitant) under the annuity.

On the other hand, we have the assigned case. Here, the defendant or insurer doesn’t want to keep the periodic payment obligation on its books. In this instance, they then transfer the obligation to a third party, achieving this result by means of a legal device called a ‘qualified assignment’. This third party (or assignment company) requires that the defendant or his insurer must hand over enough money to cover the purchase of an annuity, in order for it to be able to meet the newly transferred periodic payment obligation. This is something cannot proceed without the claimant’s agreement, which may be given as part of the settlement agreement, or otherwise in a type of special qualified assignment, the ‘qualified assignment and release’. Once the claimant has agreed to this transfer, the defendant and/or the defendant’s property/casualty insurer, are free of any continued liability, and are no longer required to make periodic payments to the claimant.

For those companies that prefer not to carry a periodic payment obligation on their books, this is obviously advantageous. The claimant also benefits from the qualified assignment, as he is now no longer reliant on the defendant’s continued good standing, credit-wise. In general, assignment companies tend to be affiliated to the same life insurance company that the annuity was bought from.

There are particular criteria that must be satisfied, if an assignment is to be designated as ‘qualified’, and these are defined in Internal Code Section 130. This qualification is vital for the assignment companies. Without it, they would incur federal income tax, as they are paid a percentage to take over responsibility for the periodic payment obligation, and that would be seen as income. An assignment that DOES qualify under the terms of Section 130 automatically receives an exclusion from the income of the company, and is therefore not taxable.

It was in order to encourage assigned cases, that this tax code provision was enacted. Were this not the case, assignment companies would be in the impossible position of owing federal income taxes, without being able to generate the necessary revenue to pay them.

Having first been introduced in Canada after a settlement for children affected by the infamous drug, Thalidomide, structured settlements gained steadily in popularity in the United States throughout the 1970’s. This gain in utilization was also a predictable outcome of the evolving IRS rulings during that time, combined with markedly higher interest rates, and an upswing in the size of personal injury awards dealt in the courts. The most significant change in IRS policy was the fact that, if certain requirements were met in these compensation cases, then claimants were not liable for federal income tax. At the same time, increased interest rates resulted in larger deferred payments becoming possible with the same or even lower present value cost.

In the United States, implementation of structured settlements is legally regulated at the federal and the state level. This intimate relationship is demonstrated by the fact that the Federal Structured Settlement Laws include sections of the (federal) Internal Revenue Code. ‘Periodic payment of judgment statutes’ (another name for structured settlements), are also included in state structured settlement laws, as are structured settlement protection statutes. The National Conference of Insurance Legislations (NCOIL) has created a model for structured settlement protection acts, a model that is currently utilized by 47 of the states. 37 of these acts are founded, either partially or completely, on the NCOIL model act.

Structured settlements are also affected by Medicaid and Medicare regulations and laws. Preservation of a victim’s Medicaid and Medicare benefits is ensured by the incorporation of structured settlements into “Special Needs Trusts” or “Medicare Set Aside Arrangements.”

Specifically created to free injury victims from the additional tax burden that capital gains and interest revenue usually creates, every payment of the entire award is tax-free. Special provisions in the tax code allow for this rather interesting structure, which essentially confers all the benefits of ownership (of the injury compensation payment) without the accompanying taxation obligations. In essence, the claimant is seen by the United States tax code as owning only an expectation of being paid, whilst not actually owning anything else.

Rather than giving the victim, his family or his law firm the cash in hand, the defendant places the money for the settlement structure with a subsidiary of a life insurance company, known as an “assignment company”. The assignment company, in turn, buys the annuity from its parent life insurance provider, holds the policy from then on, and proceeds to pay the claimant out according to the monthly (or other) schedule, required by the contract.

The federal government has actively encouraged both injury sufferers and their families to make use of structured settlements, particularly since 1982, though their implementation was already rising steadily in the 1970’s. In the decades since then, structured settlements have garnered wide-ranging and long-term support from plaintiff attorneys, legislators, disability activists and advocates, state attorney generals and judges.

Looking at the history of court-mandated damages, we see that in the past, injury lawsuits were likely to result in the payment of a single lump sum to the successful claimant. Such payments, particularly in cases of catastrophic injury, were highly likely to place the victim (or the family) in a very difficult position financially. In the throes of adapting to a radically altered lifestyle, the victim was unlikely to have the resources or the time to manage major sums of money. Mismanaged funds, especially in the early days of adjustment, lead too often to serious financial difficulties, with the unfortunate result that victims run the risk of losing specialised medical care and their very independence, eventually falling on the mercies of public assistance.

This sad cascade of effects in too many cases led directly to the efforts of a bipartisan coalition of legislators in Congress in 1982. They worked together to pass legislation that amended the tax code of the time, The Periodic Payment Settlement Act of 1982 (Public Law 97-473), an action that formally recognized – and actively encouraged – the implementation of structured settlements in physical injury lawsuits.

Vigilant regulation continues to protect the consumer, as shown in the enactment, in recent years, of consumer protection statutes in 46 states (as well as the federal government), strictly governing the conditions under which structured settlements may be sold on by claimants. In such cases, under federal law, courts must both approve and oversee a victim’s choice to sell payments from any structured settlement to a third-party company.

A structured settlement is a method of compensating injury victims, implemented as an alternative to a lump sum payment. It is a voluntary agreement between the claimant (the injury victim) and the defendant, and seeks to offer a degree of income protection for the victim, either for life or for an agreed number of years. Once the parties in a physical injury case have agreed on the long-term costs occasioned by the injury (such an agreement can happen at any time before, during or even after a lawsuit), the defendant then agrees to fund an ongoing income stream to meet these needs.

Lump sum compensations awarded by the courts are, in themselves, tax-free. However, the large sums involved would usually be invested, and the investment income attracts income tax, significantly reducing the lifetime value of the compensation. With a structured settlement, the defendant remains liable for the full compensation awarded by the court. Rather than giving it straight to the plaintiff (or their lawyers), the defendant or property/casualty company purchases an annuity, naming the claimant as the payee (though it is also legally possible to create a trust that is invested solely in United States Treasuries). The claimant owns the right to be the payee, but is NOT the owner of the annuity.

This is an important distinction, since without ownership of the annuity, the claimant is under no tax obligation whatsoever (regarding the regular payments), and receives the full benefit of the settlement. Though there are variations in the defendant’s possible management of the payment protocol (such as transferring the obligation to a third party by means of a legal device, known as a ‘qualified assignment’), the overall result is that the claimant receives a protected, long-term income that is intended to meet future living expenses and medical costs.

In several common law countries, including the United States, structured settlements have become part of the statutory tort law. They are seen as an asset-backed security, and are remarkably flexible in the initial set-up, malleable to practically any set of circumstances or needs. For example, an injury victim could perhaps receive regular monthly payments, yet also have provision made for larger payouts at intervals, to correspond with foreseeable medical and living costs, such as the replacing of an electric wheelchair every five years. It should be noted, however, that once the agreement has been finalised, it is permanently fixed, and the courts do not look kindly on attempts to renegotiate the terms. This is especially true when the structured settlement has been put in place for the protection of a minor child’s future income.

Within the parameters of the Internal Revenue Code Section 5891(c)(1) (26 U.S.C § 5891(c)(1), a structured settlement is defined as an “arrangement”, whereby the following requirements are met:

• A structured settlement must be established by:

- A suit or agreement for periodic payment of damages excludable from gross income under Internal Revenue Code Section 104(a)(2) (26 U.S.C. § 104(a)(2)); or

- An agreement for the periodic payment of compensation under any workers’ compensation law excludable under Internal Revenue Code Section 104(a)(1) (26 U.S.C. § 104(a)(1)); and

- The periodic payments must be of the character described in subparagraphs (A) and (B) of Internal Revenue Code Section 130(c)(2) (26 U.S.C. § 130(c)(2))) and must be payable by a person who:

• Is a party to the suit or agreement or to a workers’ compensation claim; or
• By a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with Internal Revenue Code Section 130 (26 U.S.C. § 130).

Prior to the 1970’s, when Congress began encouraging expanded use of structured settlements, it was often the case that victims in receipt of large awards were placed in the unenviable position of dealing with life-changing physical effects, at the same time as having to deal with the stresses of managing huge sums of money, often for the first time. In these circumstances, it is not surprising that many people found themselves without the resources for a life of medical care.

It is the measured and protective response of structured settlements to the preservation of future security for injury victims, that attracts the endorsement of national disability rights organizations, such as the American Association of People with Disabilities, and the National Organization on Disability.