You have probably heard the term “structured settlement” before, whether or not you know if the term applies to your settlement. In many situations, a structured settlement is the most agreeable solution to a civil case. Only available in civil cases, structured settlements are often agreed upon as a way for either a plaintiff or a defendant to avoid the costs and time commitment of a trial.
What is a structured settlement?
When a plaintiff files a civil case, for example, a personal injury lawsuit against a corporation or another individual, the defendant then has essentially two options. They can either take the case to trial or they can settle outside of court. Many defendants and plaintiffs will agree to reach a settlement outside of court because court is an expensive and lengthy process that can take months or even years to resolve. If a defendant knows that he (or it, in the case of a business entity) has a very low chance of winning the case, like, for example, if the plaintiff has damning evidence against the defendant, they may decide to settle outside of court, rather than trying their luck in court.
Essentially, a structured settlement is an agreement between the plaintiff and the defendant that provides the plaintiff with monetary payments over time. This may be for a set number of years or for the rest of the plaintiff’s life. This second time duration is most common in cases having to do with injuries or life-threatening illnesses that were contracted or caused by proximity to chemicals or substances during normal work duties.
In contrast to lump sum payments, which provides the plaintiff with one large payment, a structured settlement pays regularly over time. While some might prefer a lump sum instead of a structured settlement, especially if there are serious bills that need to be dealt with immediately, most people prefer a structured arrangement, which provides for their long-term needs and goals. A structured approach to a settlement almost always means financial security, making them the ideal choice for those whose ability to work has been impaired by the negligent actions of someone else.
Most of the time, a structured settlement is paid not by the defendant themselves, but by their insurance. How much a person or business entity has to pay will usually depend on what the injury is, how extensive the damage is, and what kind of costs the plaintiff now has to deal with as a result of the injury.
Structured settlement payments are guaranteed by the court, based on the plan that the plaintiff and the defendant make during the settlement process. The most common kinds of cases associated with structured settlements are personal injury cases, resulting in long-term medical care, disabilities (both those that are permanent and those that are temporary), injury involving the mentally impaired or those who are underage, injury or physical harm that shortens a person’s life expectancy, or for spouses or children of someone who has died as a result of a business or another person’s negligence.
Structured settlements may not be right for everyone. Here are some of the pros and cons associated with these types of settlements.
· Lower taxes on incoming funds. If a person chooses to receive a lump sum over a structured payment plan, they may face taxation, since this sum is often classified as income. However, if you have an annuity, these are often tax-free.
· Better planning for future needs. Studies have shown that people who receive their compensation as a lump sum usually spend the balance of the sum within five years of receipt, even if it was intended to carry the person through the rest of his or her life. With a structured settlement, however, a person gets regular payments that can be more thoughtfully used to pay for medical care, housing, and other needs.
· Professional management ensures financial security. Unlike a lump sum that is handed directly to the plaintiff, a structured settlement usually has to be managed by a professional. Choosing the right professional can make it much easier to use the money from a structured settlement for long term expenses.
· Many structured settlements can be designed specifically to cover unexpected expenses in the future, or to include a contingency plan if medical costs suddenly go up.
· Lump sum payments and structured settlements can often be combined, so that the individual receives a large payment right now to deal with expenses that might have been piling up over the time that it takes to file a lawsuit and then to also provide steady income in the future.
· If there is unexpected progress in the field of medicine around a person’s medical condition that was the cause for the structured settlements, most settlements will provide funds in order for the plaintiff to try the newly developed treatment.
· A structured settlement is often the only option that both the plaintiff and defendant will agree to. In many cases, if both parties want to settle, but they disagree about the terms, the mediator will suggest a structured settlement as a solution that benefits the plaintiff without being unduly punitive towards the defendant.
· Even with all of these positives, there are some cons associated with structured settlements. Here are some of the negatives that might be associated with structured settlements:
· Plaintiffs who demand too much control over their structured settlements usually find that they will be penalized by the IRS. In some situations, if the plaintiff tries to control the money, the IRS will decide to forfeit the tax break that is usually supplied to those with a structured settlement.
· While most settlements provide for drastic changes in medicine or the economy, some plaintiffs fear that if there are changes to how much their treatment costs or general changes in the economy that makes rent, mortgage, or food far more expensive than it was at the time of the structured settlement, the settlement will not cover those changes in cost.
· There is always the possibility that the broker or company who is actually responsible for paying the structured settlement (usually an insurance company) goes out of business or declares bankruptcy. In this situation, it is possible that the plaintiff loses their structured settlement altogether.
· It can be difficult to know whether a lump sum or structured settlement is a better choice for some plaintiffs. Because insurance companies do not have to disclose how much they would be willing to pay for either situations, lawyers often do not have enough information to help their client or clients make an informed choice. In general, however, insurance companies will pay more with a structured settlement overt time than they would be willing to offer in a lump sum payment.
A structured settlement is often the smartest, fastest choice for plaintiffs and defendants alike. While going to trial may sometimes result in a more “successful” result for a plaintiff, if he or she does not have the time to go through a lengthy court process, even if they are sure to win, settling outside of court with a structured plan can get them the funds they need without prolonging the entire situation.
Are structured settlement loans allowed?
Sometimes, a structured settlement or annuity is not enough to cover medical or living expenses. If there is not a clause in the settlement that allows the plaintiff more money if costs continue to rise, many people will start looking for a different solution. You may suddenly encounter a large bill that you need to pay or have a lingering debt that you want to pay off.
A loan seems like a great option, especially because you can list your structured settlement as an asset. And because they are guaranteed by an insurance company, there is probably no payment more secure than structured settlement payments. However, the truth is that you cannot get a loan against your structured settlement, despite the fact that they would make the very best possible collateral.
Unfortunately, if the lender needed to put a lien on those payments or garnish them like wages because you were unable to make payments on your loan, they would have no way to do this to your structured settlement. Additionally, the insurance company that pays the structured settlement would not be able to divert the payments directly to a lender.
There is a way, however, to get access to a larger sum of money that does not require you and a lender to break the law in order to access the money. You can sell all or some of your annuity or structured settlement payments to an entity that will pay you a large lump sum of money in return for the payments.
Selling Structured Settlement Payments
If you have watched television in the last five years, you have probable seen an advertisement for one of many institutions that buys structured settlement payments and provides the original receiver with a lump sum of cash.
There are many reputable companies that buy structured settlement payments from individuals, giving you a reasonable deal while getting some liquidity. The best deal that they can make you is to buy only some of your payments, leaving you with the rest of your payments to continue benefiting from most of your structured settlement.
While you cannot use your structured settlement to get a loan, you can easily liquidate part or all of the settlement in order to get the money that you need right now. Luckily, there are buyers actively looking for these settlements and they have competition, so they are willing to offer better and better deals in order to get ahold of your payments. This doesn’t just happen, however—in general, a judge has to decide that it is in your best interest to have that lump sum, instead of just the regular payments you were originally promised. Depending on the federal and state laws that apply to your particular situation, it might be very difficult or very easy to get a judge to agree to this action.
Some of the reasons you might need or want to sell your payments include:
· The need or desire to put a down payment on a new home
· Starting a new business
· Paying tuition for college or other higher education opportunities
· Getting rid of other debt, including credit card debt, loans, leftover medical bills (especially those having to do with health conditions caused by the negligent party now responsible for the settlement)
· An impending divorce or upcoming marriage
· Investing in someone else’s business or in a retirement account
Any of these are valid reasons to sell part or all of your structured settlement. In general, if this is the only way for you to obtain the money you need to pay off a legitimate debt or expense, a judge will agree to let you sell your annuity or structured settlement. Some buyers will even provide you with a cash advance, before the judge makes his decision, to cover any impending expenses that need to be dealt with now. The more payments you sell, the larger your lump sum will be. If you are supposed to be receiving payments for the rest of your life, you may be able to get a very large lump sum in return for the buyer taking possession of those payments.