Elijah E. Cummings's Scrutiny of Selling Structured Settlements to Third Parties

See the story in Washington Post on August 27 about Rep. Elijah E. Cummings who looking into structured settlement transfer transactions by factoring companies who are buying out the rights from injury claimants to receive future structured settlement payments in exchange for an immediate lump sum payout.

Cummings is addressing very relevant concerns pertaining to the structured settlement buy-out industry. Namely, the sale of stable and secure future payment streams for a current lump sum that amounts to far less than the total of the future payments and is prone to be spent out quickly, something that isn't the case with long-term structured settlement periodic payments.

This is the stance of critics of the factoring industry in general, while advocates defend the structured settlement cash out transactions for people who are in desperate money now and have no other financial sources to fund their current needs.

It isn't necessary a contradiction, and structured settlement transfers should be differentiated on the basis of whether the buyout is in the payee's best interest - when the sale should be justified, provided it's fair and reasonable - or not, in which case it should not be approved. Indeed, this is the purpose of the Structured Settlement Protection Act that clearly does support buying structured settlement payments but demands that the transfer is in the best interest of the claimant. The court should rule on that at the hearing that is legally required for selling structured settlement payments.

In the above Washington Post report, the most important passage is the quoting of Cummings's statement in saying that what claimants selling their structured settlement streams have to know is that while it may be a momentary solution, "a year from now, when they spend all the money, they’ll get nothing else and they will be worse off."

That is in fact the essential point of selling structured settlement payments - you get a lump sum at the moment; however, you loss very valuable future payments. Once sold, you'll not have those periodic payment streams, and if you are not using your lump sum wisely you'll be left with nothing. This is in addition to the discounting rate that reduces the lump sum to much lower than the original sum of the future payments.

It should therefore in each case be judged whether the transfer is fair and should be supported or not. The sale of a structured settlement annuity in itself must not be viewed as bad in itself. It depends on the specific situation in question and the best practices by the factoring companies.

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