Myths « Andres Financial Group

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Myths

Myths about Stuctured Settlement Transfers

Myth: Most payees who are receiving structured settlement payments liquidate their future payments.

Reality: Actually, most payees who are receiving structured settlement payments choose to continue receiving said payments according to the original payment schedule. NASP believes that significantly less than 10% of structured settlement recipients ever complete a secondary market transaction.

Myth: When a payee pursues a structured settlement transfer, they sell all of their future payments.

Reality: In fact, the vast majority, more than 97%, of secondary market transactions involve the transfer of only a portion of a payees future payment rights. Often, a payee makes the decision to transfer structured settlement payments because they have a specific need, desire, or objective which they hope to address or achieve. A change in their life circumstances (i.e. a divorce, death, lost job, home foreclosure, need to relocate, etc.) may have created a need to monetize the financial asset. Or, the payee may desire to raise money in order to put a down payment on a home, make home improvements, pay educational expenses for themselves or a family member, pay off debt, etc. In any case, rarely is a payee seeking to liquidate their entire payment stream.

Myth: Payees are forced to pay high discount rates to monetize their future payment rights.

Reality: Reports of funding companies routinely using discount rates of 20, 30, or 40% or higher in secondary market transactions are greatly exaggerated or simply wrong. A typical discount rate would be in the range of 12 to 19%. Occasionally, in a small, short- term transaction, a discount rate might exceed 20%, but this is the rare circumstance. (For a complete discussion of discount rates, see “Discount Rates.”) The discount rate in a particular transaction depends on a number of factors. NASP estimates that in a typical secondary market transaction, the average discount rate used by the funding company would be around ____%.

Myth: Payees who monetize their future structured settlement payment rights are unsophisticated, naieve, and foolish.

Reality: This is one of the biggest myths about structured settlement payees. NASP members have fond that although payees who pursue and complete these transactions may not have advanced business degrees from Ivy league colleges, but these people know more about their own financial, personal, and family circumstances and situation than anyone else. We find our customers (the payees) to be intelligent, thoughtful, and informed. They understand their own finances and personal situations better than anyone and they are determined to control their own lives and financial affairs. They are proud and are not looking for handouts or charity, but they sometimes resist being forced to go to court and discuss confidential, intimate personal and financial details about their lives in open court. They also are often surprised that they were not informed when they agreed to a structured settlement that if they later needed liquidity relative to their future payments, they would have to go to court.

Myth: A robust secondary market makes structured settlements less desirable in the context of settling lawsuits.

Reality: The secondary market insures the availability of liquidity options for structured settlement payees and helps to insure that one is able, when they need to do so, to monetize future payment rights, maintain control over one’s financial assets, and address a change in one’s life, financial, or personal circumstances. This increases the value, and thus the desirability, of structured settlements. Transfer Statutes and court approval of these transactions insure that structured settlement payment rights will not be foolishly dissipated.

Myth: It has been argued by some opposed to the secondary market that lawyers and Judges are less likely to recommend and/or approve structured settlements for settling lawsuits because payees will foolishly sell their future payment rights to a funding company shortly after settling for a greatly discounted amount.

Reality: This contention ignores several important facts about the secondary market:

that all secondary market transactions must be court-approved in accordance with a Transfer Statute;
that the vast majority of structured settlement transactions involve partial transfers;
that payees are provided disclosures before signing a contract with a payee and it takes time to complete the court approval process, thus providing the payee ample time to consider these transactions and decline to move forward;
that a small percentage of payees actually pursue secondary market transactions.

Those who understand the secondary market, realize that the liquidity options available to payees in the secondary market, and the protections provided by Transfer Statutes, enhance the value and desirability of structured settlements. A viable secondary market should make structured settlements more attractive to payees, lawyers, and others, not less so.

Myth: Individuals who are receiving structured settlement payments are seriously injured, unable to work, and 100% dependent on their structured settlement for their income.

Reality: Structured settlements are used to settle all kinds of cases, both large and small. They are not, at all, limited to catastrophic or serious injury cases. Structured settlements are used to settle wrongful death cases, where the payee wasn’t even the person who was injured. Those who pursue structured settlement transfers have sometimes inherited the right to receive the future payments from others and had nothing to do with the initial structured settlement. Payees recover from their injuries and have no lingering, ill effects from same and return to work. The amount of the structured settlement payments do not always depend on the severity of the payees injuries. Some transfer matters involve small monthly payment streams or periodic lump sums. In short, each structured settlement, each payee, and each proposed transfer is different. The bottom line is that most payees who pursue transfer matters are not dependent on their structured settlements to provide all of their monthly income. Even those that are unable to work, may seek to transfer and assign only a portion of their future payment rights. Consider the wheel-chair bound, but independent, payee that is receiving $ 6,000.00 per month under their structured settlement, and wants to purchase a handicapped-accessible van for transportation to and from school or therapy and seeks to complete a transfer of $ 750.00 per month for 60 months in order to purchase the van.

Myth: Instead of transferring and assigning structured settlement payments in a secondary market transaction, a payee should get a bank loan and use the structured settlement payments as collateral.

Reality: Some payees do not have good credit and/or desire not to incur additional debt. Moreover, a secured bank loan, where the structured settlement payments are used as collateral for the loan, is considered a “transfer” under a Transfer Statute, which means that the bank making the loan (the transferee) must secure court approval of the bank loan. Commercial banks simply will not incur the expense of seeking court approval in order to gain the privilege of making a loan. Banking regulators have been reluctant to allow these types of assets to be acquired by commercial banks and/or used as collateral for loans, due to liquidity and regulatory concerns. Structured settlement transfers may involve the transfer and assignment of periodic lump sum payments and/or monthly payments that do not commence for several years. Sporadic and delayed loan payments are not conducive to bank lending. In short, bank loans are NOT viable options for structured settlement payees.

Myth: Funding companies make enormous, risk-free profits on these transfers.

Reality: All transactions must be court-approved. If a court declines to approve a transaction, then the funding company earns no profit at all. Moreover, by the time the transaction is considered by the court, the payee the funding company has already incurred all of the costs and overhead relative to the transaction. So, if a transaction is not approved by the court, not only does the funding company not make a profit on the transaction, but in fact the funding company suffers a significant loss on the transaction. Funding companies have a strong incentive to present the best possible transaction they can to the court for approval, otherwise the deal is a loss for the funding company. The cost of funds for funding companies acquiring structured settlement payments varies.