The Pros and Cons of Getting Cash for a Settlement
The decision to get cash for a settlement does not come easily. After all, these monthly payments are funds that you have likely depended on to some extent, and selling will stop those payments. But if you need a large sum of cash to put money toward something that will make a positive difference in your life, such as a down payment on a home or car, selling all or part of a structured settlement may be more beneficial to you than keeping it the way it is. Selling involves completing a number of steps, and is known as factoring. It can take anywhere from one to three months to see the money from a cashed settlement.
That being said, there are some obvious pros and cons to cashing in a structured settlement. Some disadvantages to getting cash for your settlement:
- Structured settlements and annuities are sold at a discount, which means that the money you get through the sale is less than what you would have received had you continued to accept periodic payments through the life of the annuity.
- Low regulatory involvement: Those who buy structured settlements belong to an industry that is currently unregulated, which allows for more than a fair share of unethical businesses.
- Taxes: You'll be charged an excise tax or up to 40% if you choose to cash a settlement for an invalid reason. You will also be incur liability for state and federal taxes on your lump sum.
- Legal aspects: There is a lot of red tape to pass through before the money will be seen, and some settlements legally cannot be sold.
Some advantages to getting cash for your settlement:
- Liquidity. A complicated word that just means how freely you can spend the money that you have. The "structure" in a structured settlement limits the liquidity of the settlement money that you are entitled to, whereas cashing in a portion or all of a structured settlement frees that money for immediate use.
- Value. You can capture the current value of the money that you're owed. Because structured payments are equal each month, the effects of inflation mean that the real value of your money decreases over time.
- You don't have to wait for credit approval. Although you may need to validate your reasoning for cashing a settlement, you can't be denied your settlement because of a bad reference or credit history.
- Relatively quick payment. Considering the time required to finish a loan process, factoring is a quick process, taking as little as three weeks.