When an individual settles a lawsuit or worker’s compensation case, the money is often paid out through a structured settlement. The structured settlement outlines a formal plan for paying out the awarded amount over a long period of time. That means that a “million dollar settlement” is quickly reduced to smaller payments that are received over many months or years. Payments may be made annually, quarterly, or periodically, but once the settlement agreement is reached, the terms of the agreement do not change.
Through the years as structured settlements have become more commonplace, recipients have often found themselves in need of money faster than it is being paid out. This may happen as a result of unanticipated medical needs or a loss of income, or it may be that more money is desired to fund the purchase of a home or other investment. When these types of situations arise, people turn to companies that offer settlement funding.
Simply put, settlement funding is when a settlement recipient sells the rights to their total award in exchange for a smaller lump sum immediately received. Typically the companies in the settlement funding business offer a fraction of the value to the recipient. The recipient gets the money they want now in exchange for the total amount of the judgment being legally transferred to the settlement funding company.
For example, if you were awarded one million dollars to be paid out in equal installments over the next 20 years, you might be receiving just a couple thousand dollars every month. If instead of receiving small checks every month for the next 20 years you could receive one lump sum payment of six figures, you might do it, right?
That’s the reason settlement funding exists. As the recipient, you are happy with a lump sum now even though it is worth far less than your long-term payments would have been. The settlement funding company is also happy to have received a guaranteed income stream worth far more than what you have been paid. While this rosy scenario sounds foolproof, misunderstandings and shady practices often mean decisions about settlement funding need to be made carefully.
Settlement funding options are available in most states, but they are closely regulated and may carry tax implications. Individuals considering settlement funding should investigate the impact on their personal financial situation by consulting with a tax attorney or financial planner. The lure of cash-in-hand may need to be tempered with the reality of your situation.
