Cashing Out a Structured Settlement: Reasons & Considerations

Key Takeaways

• Cashing out your structured settlement will result in a lower lump sum payment, compared to the scheduled payments you would have originally received.
• You could get a cash advance, typically up to $5,000, from the factoring company.
• There is risk involved when cashing out your structured settlement.
• You will need to present your case before a judge to cash out your settlement.

Factors To Consider Before Cashing Out a Settlement

The two primary factors to consider before cashing out are your need for liquidity and your willingness to lose a steady stream of income.

Ask yourself if you’re willing to lose out on higher scheduled structure settlement payments in exchange for an immediate lump of cash. If your need is dire, the liquidity may be worth the risk.

Some Reasons Why People Cash Out Their Structured Settlements

• To cover personal injury costs
• Their income is reduced but they have the same expenses
• They want to start a business
• They want to leave a legacy
• They’re experiencing costly car repairs
• Debt consolidation and financial freedom

Selling your settlement payments would also help you avoid paying the interest rates associated with loans or taking on more debt through credit cards.

However, due to the present value of your structured settlement, the price you’d pay for cashing out your settlement is a guaranteed lower payout. According to the U.S. Securities and Exchange Commission, the lump sum you’d be offered will be much lower than the total periodic payments you’d receive otherwise.

You should also consider potential costs associated with cashing out your settlement. You’ll have to pay attorney fees, a discount rate set by the factoring company and other potential charges.

Note that the transfer can take up to 90 days. If you need quick cash, you may have to explore other options.

Impact on Long-Term Financial Stability

Cashing out your settlement will eliminate a steady stream of income. It may be harder to strategize spending a lump sum versus protected scheduled payments.

There isn’t a singularly effective method to cashing out a structured settlement — consider all of your options. Most interested in cashing out their structured settlement only sell a portion, according to the National Association of Settlement Purchasers.

So, instead of cashing out all your remaining payments you could cash out only a part of your structured settlement.

Tax Implications and Legal Considerations

According to Section 130 and Section 104(a) of the Internal Revenue Code, proceeds from cashing out future structured settlement payments are tax-exempt.

Cashing out structured settlement payments is also exempt from state taxes and taxes on dividends and capital gains.

Cash From a Structured Settlement Is Exempt From:

• Federal Taxes
• State Taxes
• Taxes on Dividends and Capital Gains

If you are interested in cashing out your structured settlement, know you’re legally required to present yourself in front of a judge. The judge will decide if cashing out your structured settlement is in your best interest.

How To Cash Out Structured Settlement Payments

The process of cashing out structured settlement payments is like cashing out lottery payments. Five straightforward steps can help walk you through the process of cashing out your structured settlement.

5 Steps To Cash Out Your Structured Settlement

1. Determine the exact amount of cash you require: Sell only the exact amount necessary. For instance, if you need $40,000 to cover medical expenses, sell that precise amount. If you sell too little and subsequently request another transfer, a judge may deny your request due to poor money management. Contact one of our representatives if you need help calculating the amount you need.
2. Research companies that purchase structured settlements: Verify if the factoring company holds a license to operate in your state. Avoid those who pressure you into a deal for promised quick cash. The National Association of Settlement Purchasers recommends obtaining multiple quotes to ensure a fair arrangement.
3. Review your contract with your attorney: Collaborate with your attorney to select the best quote. If necessary, involve a financial advisor. Review the fine print and ask about the estimated duration of the court approval process from your attorney.
4. Obtain court approval: You will need to present your case before a judge. The factoring company will assist you in organizing the required paperwork prior to your meeting with the judge.
5. Receive your lump-sum cash: The cash-out and court approval process may take as little as 45 days, but the duration can vary depending on your state of residence.

The process to cash out your structured settlement usually takes 45 to 90 days. However, the transfer can take as little as 20 days, according to Saxton.

How Much Money Can You Get for Your Settlement?

The amount you can get when you cash out your structured settlement is not the total amount of all your payments added together. Multiple factors determine how much money you get.

Factors That Affect Your Settlement Payout

• The number of payouts in total
• The amount of payments left
• The amount you want to sell
• The discount rate

Negotiate your discount rate with several factoring companies to get the best deal.  Cashing out structured settlements generally have a discount rate between 9% to 18%, according to the National Association of Settlement Purchasers.

If you’re in a time crunch for cash, some factoring companies allow a cash advance. The cash advance can provide several thousand dollars for immediate relief.

Demand and inflation also play a part in your structured settlement’s worth.

Demand

As the demand for purchasing payments goes up, the amount you get for your structured settlement goes up, and vice versa. If more people are interested in purchasing steady income, you’ll get more for your payments.

Certain market conditions can make your structured settlement payments more or less appealing.

Inflation

The value of the money in your structured settlement goes up and down over time due to inflation. Similar to demand, this influences how much cash you can get from selling your structured settlement.

A factoring company buying your payments of $1,000 a month starting in 2024 will be able to buy less with that payment than you could with $1,000 today.

Knowing these principles can help you understand the difference between the present value of money — what you can get now with an amount — and the future value of your money.

Cashing Out Structured Settlement FAQs

How can you get money from a settlement faster?

Having your paperwork in order and presenting a solid case in front of the judge can speed up the process of cashing out your settlement.

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Can you get a cash advance on a settlement?

Most reputable factoring companies offer cash advances up to $5,000 for structured settlements.

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What are the pros and cons of cashing out a settlement?

The main pro of cashing out your settlement is liquidity to cover any emergency expenses. The primary con is forfeiting stable regular payments for a lower lump sum.

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