For the individual entitled to compensation for injuries caused by the negligence of another party, structured settlements offer an alternative to the lump-sum payment traditionally associated with lawsuit settlements. Instead of a one-time payment at the conclusion of the case, a structured settlement usually involves a series of periodic payments at intervals specified by the person entitled to receive the money.
Selling periodic payments leads to abuse
Structured settlements are accomplished through the purchase of an annuity when a claim is settled. The money earns interest in the annuity until it is paid to the individual entitled to receive the payments. If a person needs money for the purchase of a home or to take advantage of an investment opportunity, it might not be practical to wait for a scheduled payment.
A secondary market developed in which individuals sell the future payments they are scheduled to receive under a structured settlement to buyers in exchange for a one-time cash payment. The buyer pays the seller percentage of the value of the future payments due to be paid under the annuity. Individuals can sell all or some of the future payments.
Problems quickly arose with the sale of structured settlement payments as sellers were taken advantage of by unscrupulous buyers who acquired the payments at a fraction of their actual value or by failing to disclose hidden fees and other charges. In some cases, individuals who sold all of their future payments squandered the money and were left destitute.
State and federal disclosure laws to protect sellers of structured settlements
Every state has passed legislation regulating the sale of structured settlement payments. Although the laws may differ slightly from one state to another, they all contain at least the following basic protections:
. The difference between the amount the seller will receive from the buyer and the value of the payments under the structured settlement must be disclosed.
. A court must approve the sale of the future payments. Most states require that the seller be represented by an attorney and that the attorney certifies that the seller understands the transaction and that it will not create undue hardship for the seller.
. Buyers are required to make written disclosure to the seller of all terms of the transaction.
The Structured Settlement Protection Act enacted by Congress in 2002 was an attempt to tie together the elements of the various state laws into a federal statute. The federal law includes a requirement that sellers have a period of time as set by state law to cancel the transaction, and it imposes a penalty on sellers in the form of an excise tax on buyers who fail to comply with disclosure laws. The excise tax is 40 percent of the amount of the payment sold to the buyer.
Structured settlements require professional guidance
Anyone resolving a claim with a structured settlement or selling future periodic payments should only do so with the advice and guidance of an attorney. Professional assistance might avoid the need for selling payments by anticipating future needs.