What is a settlement?
When somebody plays a part in another person’s injury or financial losses, they’re compelled by a judge or jury to pay a compensation to the wronged party. This compensation is known as a settlement.
A good example of a settlement situation is when a careless driver bashes the vehicle of another driver and pays the other driver a certain sum to make up for their wrongdoing.
Other examples may include:
- A quack doctor paying a settlement to a patient for prescribing a wrong medication or administering a wrong treatment.
- A carefree business owner paying a settlement to an employee for the role their business played in endangering the lives and well-being of the employee.
How are settlements paid?
Generally speaking, civil lawsuit settlements are paid in two ways.
- As a one-time payment, wherein the offender pays the wronged party all the compensation they’re owed in one go.
- As a structured payment, wherein the offender agrees to pay a regular stream of payments over a given period – say a given sum every month.
The latter is also known as “structured settlements.”
Why structured settlements?
The biggest reason for structured settlements is to give financial security to the wronged party so that they will have enough money over time to lead their expenses and medical bills.
The belief in the “settlement world” is that when you give large sums to people, they’re likely going to blow it away in a short while. So, to prevent this, it’s better to break settlements down into periodic payments.
Some plaintiffs sometimes grumble at the idea of structured settlement because they prefer to get their money all at once – reasons best known to them.
But if one looks at the bigger picture, one will notice that it makes more sense accepting structured settlements than lump settlements.
Firstly, it saves you from overspending. Secondly, it’s more like you’re saving money to receive at a later time. Thirdly, you’ve more or less created a regular stream of income for yourself. Fourthly, your payments aren’t taxed if you opt for a structured settlement.
Finally, you can decide how you want to receive your money as time goes by. Do you want payments to decrease with time, increase with time, get delayed at some points, or extended to your heirs? The ball is absolutely in your court.
And peradventure you ever find yourself needing money urgently at some points in future, you can dip into your future payments from a structured settlement by selling a part or all of it to a factoring company.
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For instance, let’s say after month 7 you have a financial emergency (say you need to pay for your mortgage), you can simply reach out to a factoring company and sell any portion of your structured settlement that would fetch you the amount you need to settle the mortgage.
Is it legal to sell a structured settlement?
It is absolutely legal to sell a structured settlement for instant cash, although you’ll need to get court approval before proceeding.
You’re not breaking any law by selling your structured settlement. What you’re simply doing is borrowing from your future payments. It is still your money, only that you’re getting it before the due date.
How to sell a structured settlement
The process of selling a structured settlement is not something you can DIY. You’ll need the help of an attorney, an accountant, and/or a financial advisor. These guys understand the structured settlement market more than anyone. As such, they’re in the best position to help you find a credible factoring company to sell to.
How to sell a structured settlement: a diagrammatic breakdown
Do you need to go to a court of law before selling a structured settlement?
Yes, you do.
In fact, the court-approval process often lasts for around 45 to 60 days.
In court, the judge will examine the details of the sale – whether you’re selling all your future payments, a portion of each payment, or some of the payments. He will also look into your financial situation – whether you have other means of income – and how the sale will affect your overall financial status.
The reason for this examination is to know whether you can survive the coming months without your structured settlement paychecks.
Are there any charges involved in the process?
Factoring companies charge a discount rate on the sale of structured settlement payments. This rate usually ranges from 9 to 20 percent, depending on the perceived risk associated with your payment.