Guest Post: Curt Matsen, CPA is the author of the Structured Settlement Guide, a comprehensive website that walks you through what settlements are, how to negotiate them, what to look out for and how to best benefit from them all in plain and simple English.
As litigious of a society that we live in today, I am constantly surprised that a structured settlement is a foreign concept to the majority.
I can’t blame them I suppose. After all, a settlement applies only to a select group of individuals in a very specific situation. That said, anyone at anytime may come across this subject matter in their lifetime.
In an effort to spread better awareness of the subject matter, this article is a brief introduction to what settlements are and a handful of ways that people deal with them.
What is a Settlement?
When one is awarded or “settled” a significant judgment resulting from a lawsuit or an insurance claim, the recipient is often paid over time in installments rather than handing them over a large sum of money up front. When this happens, the settlement is said to have been structured, or planned out and hence paid out over time.
Come to think of it, it is exactly what it sounds like. But because not everyone is awarded a large judgment in court, most people are not familiar with structured settlements.
You will often read about this topic in conjunction with lawsuit claims, and rightfully so. Lawsuits are the biggest reasons that give rise to settlements. However, winning a lottery is no different if you think about it. Lottery administrators often offer the option of collecting a large payment upfront, or collecting smaller installments each month over the next X years.
Settlement Trading
Just like the stock and commodities markets, there is a robust market for buying and selling settlements as well. Because there is a market, there are also players involved such as settlement companies, attorneys, brokers, insurance agents and many others. There is even a Structured Settlement Act that governs the dealings in this field.
One can sell their entitlement to a settlement, or one can buy it from someone else. There are loans that can be taken by pledging the settlement as the underlying asset. One can also look into accounts receivable factoring of settlements, or in other words accelerate their cash flow for a big ticket spend such as paying off a mortgage, financing children’s college or starting a business.
Settlements can be further traded in after markets, similar to the concept of mortgage backed securities wherein buyers package the settlements and sell them in bundles to other buyers, often bigger institutional players.
As you can imagine, the market can get very complex, convoluted and even dirty!
Things to Keep in Mind
Though not a comprehensive list, the following thought starters should give you enough information to be dangerous in the event you come across this subject matter in your lifetime.
- Settlements are often tax free if structured the right way, whereas a lump sum payment is often taxed.
- It is statistically proven that those who receive monthly payouts manage their funds better than those who receive a lump sum payment only to lose it all within 18 months after receiving it.
- On the other hand, a lump sum payment can settle current debts, finance education or the start of a business venture.
- Collecting a lump sum up front involves a haircut to accommodate for the net present value of payments you will be receiving over time, thus it is up to you to manage the sum of money received.
Concluding Thoughts
The United States by far has the widest variety of financial products, as well as some of the most complicated ones. Heck to manufacturing, we make our money by shuffling paper right?
Not all financial products are popular and widely known to the common man, and a settlement is one such example.
But as you can induce from the article, knowledge of this matter may come in handy at any point.
I hope you found this article informative, helpful and valuable.
If nothing else, I hope you walk away having learned a new thing or two. Here is a helpful article on structured settlement brokers if you are in a situation and looking for one.
