Selling Structured Settlement Payments: Step-by-Step Guide

Key Takeaways

• The lump sum you receive for selling your structured settlement payments will be lower than the total value of the scheduled payments.
• Since they’re subject to strict regulation under both state and federal law, selling any structured settlement requires the approval of a judge.
• Before choosing a structured settlement purchasing company, check their rating with the Better Business Bureau and ensure that they’re licensed to do business in your state.

Introduction to Selling Structured Settlement Payments

Your structured settlement payments are originally paid out monthly, quarterly, semi-annually or annually to provide tax-free payments for a specified period.

While guaranteed payments offer long-term financial security, there are some instances where you could prefer a large lump sum of cash from selling your structured settlement.

Some sell structured settlement payments for emergencies, while others may consider honoring a legacy.

Common Reasons To Sell Your Structured Settlement Payments

• You need to cover major home repairs
• Purchasing a home
• Covering education costs
• Medical expenses
• Require a new car
• Unexpected moving costs

No matter the reason, you can’t tap directly into the account from where you’re receiving your structured settlement payments. That’s where cashing out your structured settlement payments can help you.

You can sell all or some of your future structured settlement payments to companies on the secondary market. The companies who purchase your structured settlements are known as factoring companies.

Source: National Association of Settlement Purchasers

This isn’t to say everyone needing cash now should jump to sell their structured settlement payments. Carefully consider all your options and consult with a financial advisor before starting the process.

How To Sell a Structured Settlement

According to the National Association of Settlement Purchasers (NASP), most structured settlement holders never sell their payments. Less than 20% complete a sale on the secondary market. Instead, most who sell structured settlement payments sell only a portion of their payments.

For example, you might receive $5,000 a month and decide to sell $1,000 of each payment for the next two years. Or you could decide to sell six months’ worth of payments.

Conducting business with factoring companies that purchase structured settlement companies can be risky. You’re guaranteed to receive less than what your settlement is worth.

Learn the steps and process of how to sell a structured settlement for cash to see if it may be worthwhile in your situation.

Steps To Selling a Structured Settlement

There are essentially five steps to selling a structured settlement:

1. Determine the amount of cash you need.

   Only sell the exact amount you need. If you need $40,000 to cover medical costs, sell that amount. If you sell too little and request another transfer shortly after, a judge may deny your request due to perceived poor money management.

2. Research trustworthy structured settlement purchasing companies.

   Verify that the factoring company is licensed to do business in your state, talk to their representatives and avoid those who try to push you into a deal you’re not ready for. NASP recommends requesting multiple quotes to make sure you’re getting a fair deal.

3. Review your contract with your attorney.

   Choose the best quote with your attorney. Involve a financial advisor as well if necessary. Review the fine print and ask the attorney exactly how long the court approval process will take.

4. Get court approval.

   You will need to present your case before a judge. The factoring company will help you get your paperwork in order before you meet with the judge.

5. Receive your cash lump sum.

   The cash-out and court approval process can take as little as 45 days, though it can be longer depending on which state you live in.

Understanding the Court Approval Process

With the exception of New Hampshire, all states require a judge’s approval to sell your structured settlement payments. The court approval process to cash out your structured settlement usually takes 45 to 60 days.

Laws established by Congress and the individual states designed the court approval process to encourage trust in structured settlements and protect the people covered by them.

Federal laws force secondary market payment sales to comply with state laws requiring court approval. This process prevents settlement holders from being exploited by dishonest companies.

A judge must review your sale and speak to you to determine if the sale is in your best interests.

The judge will ask a series of questions, such as:

• Do you understand the transfer agreement?
• Did you have an opportunity to review this transfer with a financial professional not connected to the structured settlement buying company?
• Do you understand that selling payments means you will receive a lump sum less than the total amount of future payments?
• Do you feel comfortable that you shopped around for the best deal?

The factoring company you choose will coordinate the paperwork and arrangements for a court to review.

Factors To Consider Before Selling

Selling your structured settlement payments could affect your retirement plans, eligibility for Social Security or other government assistance programs, and your tax liability.

You’re also going to receive less than you were originally promised. Before making any concrete plans to sell, understand that buyers are offering you a discount rate. You will not be paid the full amount you would have received in monthly payments.

Whether selling your structured settlement payment is worthwhile all depends on how urgently you need cash and for what purpose. The benefits of liquidity could outweigh the other factors. Make sure you speak with a financial advisor and attorney to help you fully consider the pros and cons.

Before you sell your structured settlement payments, the Consumer Financial Protection Bureau recommends you also ask the following questions:

• What is the cancellation policy?
• Do I have to pay taxes?
• Will there be an impact on public benefits, such as Medicare?
• What are my rights under state law?
• Are there complaints against the factoring company?

Source: Consumer Financial Protection Bureau

Structured Settlement Purchasing Companies

Structured settlement buying companies, also known as factoring companies, help you exchange your structured settlement payments for a lump sum payout.

Because of the time and money it takes for them to prepare your case for court review, factoring companies are motivated to present only those structured settlement sales with a high chance of approval.

Source: National Association of Settlement Purchasers

This isn’t to say all factored companies are trustworthy. Do research in advance to ensure your money is in the right hands.

Choosing a Reputable Purchasing Company

To make sure you’re choosing a reputable company, check if the company is licensed to do business in your state with your state’s Attorney General office or state consumer protection office.

Check the company’s rating with the Better Business Bureau. You can also talk to their representatives and see what professional organizations they’re partnered with.

There are several red flags to look out for with factoring companies. If a company you’re considering makes any of the claims or behaviors listed below, consider choosing a different company.

Red flags to be wary of include (but are not limited to):

• Claims you’ll have your cash within two weeks after signing a contract.
• High-pressure sales tactics.
• Claims your structured settlement can be sold in an arbitration proceeding. This is untrue, as it must be approved by a judge.
• Companies that send a contract in the mail before you have talked with them or reached an agreement.

Source: National Association of Settlement Purchasers

Structured Settlement Calculator

Use our structured settlement calculator to estimate how much your future payments would be worth today. You’ll need to know the terms of your specific contract to use this calculator.

Information Required To Use Our Structured Settlement Calculator

• When your next payment is scheduled to be made
• The payment amount
• The remaining number of payments total
• Your frequency of future payments

Using a structured settlement calculator as a first step before hiring a financial advisor or speaking to a lawyer can help you determine if selling your structured settlement is worth your while. You may find that the lump sum of cash you’d receive would still not cover your financial needs.

Understanding Structured Settlement Calculations

Our structured settlement calculator utilizes a simple formula that incorporates details from your settlement contract and a fixed discount rate to estimate the value of your payments.

The discount, calculated as a percentage of your lump-sum payout, goes to the purchasing company to account for inflation and the decreased purchasing power of future payments as well as the risk they assume when they buy your payments.

Generally, transfers are completed at a discount rate between 9% and 18%, according to NASP.

Note that certain variables, such as payments of different amounts or irregular payment schedules, may not be accurately accounted for in the calculation. Consider our calculator’s estimate as a baseline figure.

Frequently Asked Questions About Selling Payments

How long does it take to cash out a structured settlement?

The court approval process to cash out your structured settlement usually takes 45 to 60 days. Depending on which state you live in, the process could ‌take up to 180 days, according to the National Association of Settlement Purchasers.

Should you sell your structured settlement?

If a trusted financial professional and judge approves of your request and you’ve carefully considered all options, it’s likely a sound decision to sell your structured settlement.

Which types of settlements qualify for selling?

As long as a judge approves the sale, life-contingent and temporary life annuity settlements both qualify for selling with certain companies.