Secondary Market FAQ
FAQs About Secondary Market Transfers
Here are answers to some of the most frequently asked questions about the Secondary Market for structured settlements.
Q: Do most people receiving structured settlement payments sell their future payments?
No, most people receive payments according to the original schedule. In our estimation, less than 20% of structured settlement recipients ever complete a Secondary Market transaction.
Q: I thought structured settlement payments were used to protect people who are seriously injured, can’t work, and depend on those payments for their income. Won’t selling those payments leave them without any financial support?
Structured settlements are used in all kinds of lawsuits, not just those involving serious injuries. Most people who want to transfer part of their structured settlement don’t depend on those payments for all of their monthly income.
Even people who do not have other sources of income, other than their structured settlements, may desire and/or need to sell a part of their future payment rights. For example, an individual who is unable to work (either permanently or temporarily) due to injuries he/she sustained in an accident might be receiving monthly structured settlement payment of $6,000. The Secondary Market provides the individual the flexibility to transfer $750 per month for 60 months, so that he/she could make accommodations to his/her home.
Q: What laws govern the secondary market?
In 2001 NASP and other industry leaders worked on the first a Model State Structured Settlement Protection Act. That model act has been retired and revised, and reenacted, twice since 2001. Each time NASP was intimately involved in that process. Today, 49 states have passed settlement transfer laws requiring disclosures and court approval of structured settlement transfers. Most of those track the NCOIL Model exactly or very closely. All state statutes require court approval of transfers and a few of the 49 states deviating from the NCOIL. In 2002, a federal law extended the tax-free nature of future payments to lump-sum payouts made in a sale in the Secondary Market. These state and federal laws provide a firm regulatory foundation for the home Secondary Market. Find out what the law is in your state.
Q: Why can’t I just use my structured settlements as collateral for a bank loan?
That is an option if you have good credit and are willing to take on additional debt.
Unfortunately, few banks will take your payments as collateral. That is because even using your payments as collateral for a bank is considered a transfer that must be approved by a judge in accordance with a state structured settlement transfer state. Banks typically don’t want to go to the expense and inconvenience of getting court approval just to issue a loan. What’s more, a company that purchases or loans against structured settlement payments generally must agree to take on certain obligations from the issuer|obligator. These include certain fees and agreeing to pay for the issuer/obligator' litigation expenses if there is ever a lawsuit relating to the transaction (called an indemnity). Most banks are unwilling to take on these obligations.
Q: Is it a bad idea to sell my future structured settlement payments?
Not if you know what you are doing, why you are doing it, consider all your options, and get good advice from a professional. You understand your financial, personal, and family circumstances and situation better than anyone else. You have the added security of knowing that a judge will review the transaction and protect you from being taken advantage of. But each transaction and each situation is different and a decision to transfer payments should not be taken lightly.
Q: Do I have to transfer all of my future payments?
No, it is rare for payees to transfer all of their future payments. The vast majority of Secondary Market transactions involve the sale of only a portion of a payee’s future payment rights. Most payees transfer only as much as they need to take care of changes in their circumstances—a divorce or home foreclosure, for example—or to achieve a specific goal—like a down payment on a house or tuition payments.
Q: Will I have to pay a high discount rate to get money now for future payments?
Generally, transfers are completed at a discount rate between 9 and 18%. Your exact rate depends on a number of factors, such as where you live, the length of your structured settlement, and the amount you want to transfer, as well as other factors. One should contact more than one funding company.
Q: Does the secondary market make structured settlements less useful as a tool in settling lawsuits?
To the contrary, the flexibility provided to a payee by virtue of a vibrant and available Secondary Market enhances the value and desirability of structured settlements. It does this by making sure payees have the flexibility to respond to changes in their financial or personal circumstances. Giving people the option to liquidate structured settlement payments increases the value of a structured settlement. Transfer statutes and the requirement of court approval ensure that structured settlement payment rights will not be transferred without judicial oversight.
Q: Aren’t these sales just a way for funding companies to make high, risk-free profits?
The profits are neither high nor risk-free.
It takes the funding company time and money to arrange for such transactions and prepare them for court review. If the judge does not approve the transaction, the funding company doesn’t make a profit, it actually loses money. This gives funding companies a strong incentive to present the best possible transaction to the court for approval.