What is Settlement Factoring System? Are You Familiar with That Phrase ?

Friday, March 21, 2008

A structured settlement factoring transaction describes the selling of future structured settlement payments / cash structured settlement payments (or, more accurately, rights to receive the future structured settlement payments). People who receive structured settlement payments (for example, the payment of personal injury damages over time instead of in a lump sum at settlement) may decide at some point that they need more money in the short term than the periodic payment provides over time. People's reasons are varied but can include unforeseen medical expenses for oneself or a dependent, the need for improved housing or transportation, education expenses and the like. To meet this need, the structured settlement recipient can sell (or, less commonly, encumber) all or part of their future periodic payments for a present lump sum.

Structured settlements experienced an explosion in use beginning in the 1980s.The growth is most likely attributable to the favorable federal income tax treatment such settlements receive as a result of the 1982 amendment of the tax code to add § 130. Internal Revenue Code § 130 provides, inter alia, substantial tax incentives to insurance companies that establish “qualified” structured settlements. There are other advantages for the original tort defendant (or casualty insurer) in settling for payments over time, in that they benefit from the time value of money (most demonstrable in the fact that an annuity can be purchased to fund the payment of future periodic payments, and the cost of such annuity is far less than the sum total of all payments to be made over time). Finally, the tort plaintiff also benefits in several ways from a structured settlement, notably in the ability to receive the periodic payments from an annuity (from selling annuities ) / annuities that gains investment value over the life of the payments, and the settling plaintiff receives the total payments, including that “inside build-up” value, tax-free.

However, a substantial downside to structured settlements comes from their inherent inflexibility. To take advantage of the tax benefits allotted to defendants who choose to settle cases using structured settlements, the periodic payments must be set up to meet basic requirements [set forth in IRC 130(c)]. Among other things, the payments must be fixed and determinable, and cannot be accelerated, deferred, increased or decreased by the recipient. For many structured settlement recipients, the periodic payment stream is their only asset. Therefore, over time and as recipients’ personal situations change in ways unpredicted at the settlement table, demand for liquidity options rises. To offset the liquidity issue, most structured settlement recipients, as a part of their total settlement, will receive an immediate sum to be invested to meet the needs not best addressed through the use of a structured settlement. Beginning in the late 1980s, a few small financial institutions started to meet this demand and offer new flexibility for structured settlement payees.

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  1. chill said...

    excellent posting....... The truth that structured debt settlements are usually assured implies that structured settlement businesses can acquire personal debt on low interest plus finance some other ventures with this personal debt. https://www.structuredsettlement-quotes.com

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