Many recipients of structured settlements often reach a point that the installment amounts are not able to cover a current expenditure. This may be due to the changing circumstances, such as the need for a sudden medical procedure previously unneeded by the recipient of the payout amounts. Thus, the need for a structured settlement factoring transaction comes to fore.
A structured settlement factoring transaction occurs when a lump sum payment is given as value in exchange for the future receivable amounts. There are three major aspects of these transactions that need to be properly understood in order to realize the potential benefits of this kind of accelerated payout scheme.
Structured Settlement Factoring’s Best Kept Secret
The first part is the so-called ‘best interest standard’. In this aspect, the proposed structured settlement factoring transaction must be in the best interest of the seller or original recipient of the payouts. This is a dynamic definition, which considers all the facts, circumstances and means of support present at the time of the transaction that is available to the recipient of the payouts and their dependents. This is not just about financial hardship, but should provide the recipient the opportunity to become better from their present situation but should not be haphazardly taken. If the court sees that this is not realized, then the proposal is literally thrown out the window.
The second part is the ‘discount rate’. This rate is akin to an interest rate that applies itself as a depreciation rate that decreases the value receivable by the purchaser. This though can range between 8% and 18% but is often hovering at midrange. Nowadays, legislation has been enacted to manage the rate applicable to the payment stream itself. The concept of time is factored in, allowing for a rate that applies for the whole amount over the actual period of time.
The third part is the ‘discounted present value’. This is defined as ‘the present value of future payments determined by discounting such payments to the present using the recent rate in the determination of the present value of the annuity’. This is a measure to determine the value of the future payment, taking into consideration inflation as well as present value of money. This is often set as a quotient where in the purchase price is divided by the discounted present valuation of the annuity receivable.
The Advantages and Disadvantages
As in all financial transactions, there are advantages and disadvantages that apply to the structured settlement factoring transaction. One of its benefits is that the lump sum amount can be received, in present day values, of the future value of the settlement. This means that the value received would be discounted value of the money in present terms.
On the other hand, a disadvantage is the number of possible rates that would be available, as well as the many other stipulations applicable to a structured settlement factoring transaction. This may prove to be detrimental for the recipient to receive the just and true value of the amount because of the many impositions and obligations applied to the amount to be received.
Thus, it is best to seek out both a lawyer as well as a financial planner to determine what is the best option available, considering the three aspects of the structured settlement factoring transaction as well as the advantages and disadvantages applicable in the long run.