Introduction to Settlement Funding
Those who have been wrongly injured in an accident and/or are deserving of monetary compensation due to negligence on another person's part, are often awarded a structured settlement, which is a sum of money broken into reasonable installment payments that can pay for monthly bills and provide the injured with financial security. For more basic information, we encourage you to read the National Structured Settlements Trade Association's article, Learn More About Structured Settlements.
As convenient as structured settlements are, clients can often find themselves in need of extra money or a lump sum to put down on a home, vehicle, or personal loan. Settlement funding is the purchase of settlement payments by a company which often specializes in such things.
Settlement funding serves to better the lives of both parties involved, the settlement owner and the one who buys it. Who actually benefits more from the sale is a subject that depends on who buys the settlement and what agreement the seller and buyer have made. There are some obvious advantages and disadvantages to settlement funding. The person who decides to sell a settlement benefits from an immediate lump-sum source of cash (although it must be emphasized that 'immediate' in this definition is a period of between three or four weeks) that can be used to place a down-payment on a large purchase. Of course, that lump sum payment can in itself be a disadvantage. Structured settlements are constructed to spread the payments out over a longer period of time so that victims who are injured have a sort of compensation to provide their families since they can't work. Settlement funding, where they take a lump payment of these funds, puts the family in future risk.
Some types of structured settlements, including that for workers' comp or physical injury, allows beneficiaries to take advantage of tax-free payouts, whether taken as a periodic payment or a lump sum. But those who decide to cash out a structured settlement are going to be liable for both federal and state income taxes on that amount. There are instances where cashing in a settlement may be worth the added tax cost, but it shouldn't be carried out without careful thought. Sellers will also need to research various companies before agreeing to sell to a buyer. The process of settlement funding can be time-intensive, involving meetings with a consultant or broker, a lawyer, and a judge. As such, the wrong choice of buyers can extend the whole process by months. Fortunately, the government is making it easier for those who have a true need for lump-sum payment to find and work with legitimate settlement funding companies.