Beneficiaries of structured settlements sometimes sell the settlement payments in order to receive a lump sum of cash in a shorter term. However, taking a loan against the structured settlement payments is another option. In this report attorney Matt Bracy explains how the loan process works.
Most structured settlement sales involve assigning to the purchaser the right to receive future payments under the settlement agreement. The sale may be for only five years of payments. But once a court approves the transaction, the right to receive those payments belongs absolutely to the factoring company. A more recent alternative to the sale of benefits, Bracy says, is practice of lending by a regular bank in which the collateral for the loan is the structured settlement payments. In this transaction, there is no assignment of benefits.
Courts are still involved, however. Bracy explains that the Structured Settlement Protection Act defines “transfer” to include “the creation or perfection of a security interest in structured settlement payment rights.” A loan that involves structured settlement payments as collateral thus qualifies as a transfer for purposes of the law and must be approved by a court just as a sale would be.
The court reviewing a loan will use the same criteria as would be used for a sale. That means, says Bracy, that the judge will apply the “best interest” standard. The court will ascertain that proper disclosures were made to the borrower before approving the loan.
From the standpoint of a structured settlement beneficiary, a loan may be a better deal if the period involved is relatively short, say five years, for example. The structured settlement payments become the loan payment. And Bracy observes that the interest rate for such loans is usually on the low end of the scale of interest rates banks typically charge. The caveat, Bracy adds, is that this is not for everyone, “and it doesn’t always work.” Someone looking for a larger lump sum will want to pursue something other than a loan.
The banks that are making these loans are doing a good job of accommodating the needs of the borrowers. In assignments, there is a discount rate involved that is used to arrive at a present value for future payments. With a loan, there is an actual interest rate, and interest rates tend to be “on the bottom end of the spectrum” when compared with discount rates.
Bracy also makes the point that structured settlement loans “are real loans that could be prepaid.” That means that a structured settlement beneficiary who wants to get back on the annuity can pay off the loan and begin receiving the annuity payments again.
Matt Bracy is a partner in Scheef & Stone, L.L.P., Dallas, Texas, representing businesses and business owners in the areas of general business law, contract negotiations and drafting, business formation, transactions, collections, commercial litigation and government relations. Over his career he has represented diverse businesses and individuals in private practice, and in-house as General Counsel and Director of Government Relations for multi-million dollar companies. The Legal Broadcast Network is a featured network of the Sequence Media Group.