The Structured Settlement Purchasing Industry began in the mid 1990s in direct response to the demand of certain structured settlement recipients who needed to immediate access to cash.   Even though Stone Street and its competitors have been in business for almost 20 years, there are many misconceptions that exist about this industry.  This article attempts to address these myths, and explains the reality of structured settlement factoring. 

Myth # 1

An attorney should not recommend a structured settlement to a client because the client will just cash out later.

FACT:  The overwhelming majority of structured settlement recipients (over 95% by most estimates) will never sell their structured settlement payments.  The 5% of individuals who seek to sell structured settlement payments only seek this option because they have a significant change in circumstances that occurred after settlement.  Before there was a secondary market for structured settlement payments, this 5% of structured settlement recipients had no option to cash out payments to address these needs.  This lack of liquidity was the only drawback to structuring a settlement.  The ability to tap into funds when necessary should make a structured settlement more attractive to an attorney.  The attorney can know that the client has been given a settlement that will provide for financial security, but be assured that if circumstances change, the client has another option.

Myth # 2

If an annuitant sells a tax free structured settlement payment stream, he may be subject to taxes on the lump sup payment that he receives from the purchasing company. 

FACT:   Under 26 U.S.C. § 5891 (d)(1), the annuitant will not have to pay taxes on the payment received from a structured settlement purchasing company as long as the payments that the annuitant seeks to sell were also tax free.

Myth # 3

Structured Settlement recipients are forced into these transactions on an impulse after seeing a commercial on “late night television.”

While it is true that many Structured Settlement Purchasing Companies advertise on television, it does not mean that a company will obtain an interest in an annuitant’s structured settlement payments after a single late night phone.  Due to the nature of the Structured Settlement Transfer Acts, an annuitant will have many opportunities to walk away from the transaction that he agreed to enter into “on a whim.”  A reputable structured settlement purchasing company will not charge any fee or penalty to an annuitant who walks away from the transaction before it is approved in court.  This means that an annuitant could have three months to change his mind about the proposed transaction.

Myth # 4

The Structured Settlement Purchasing Industry is unregulated.

Structured settlement purchasing companies are subject to a long list of state and federal laws and regulations that govern their business practices.    Every proposed structured settlement transfer is directly reviewed by two separate government entities for compliance with these laws -- local courts and the Internal Revenue Service.  If either the court or the IRS finds that a company has failed to comply with the law, the penalty will be severe.

First, a local court reviews a proposed structured settlement transfer agreement.  In approving a transaction, the court must affirmatively find that the structured settlement purchasing company is in compliance with all state and federal laws and regulations.  Even if, however, the company has complied with the law, the court must also find that the transaction is in the best interest of the annuitant.  If a company violates the law or if a court finds that it is not in the best interest of the annuitant, the transaction is never completed, the contract is voided, and the company must bear the substantial costs of the attempted transaction.  With filing fees, attorney costs, fees assessed by insurance companies, lien and credit search expenses, and other direct expenses, companies can expect to pay several thousand dollars for each attempt.  The practical impact of a rejected transaction is a substantial “fine” against the purchasing company.

If, however, a judge fails to see that a transaction has not complied with the state or federal act, and approves the transaction despite these failures.  The Internal Revenue Service has, and will continue, to audit the files of structured settlement purchasing companies.  IRS auditors closely review the files for statutory compliance.  The IRS can issue a fine against the purchasing company that is equal to 40% of the factoring discount.  This ensures that the purchasing company cannot profit from any transaction that does not comply with these laws and regulations. 

Myth # 5

The high approval rates found in courts suggest that courts are not closely scrutinizing these transactions.

Fact: In light of the substantial costs incurred for every attempted transaction, structured settlement purchasing companies will only seek court approval of transactions that they believe will be approved by a court.  Experienced purchasing companies listen to the concerns raised by judges, and alter internal underwriting guidelines to comply with the concerns of these judges.  As the companies will not attempt a transaction that it believes will be rejected, approval rates should continue to remain high.