If you have a structured settlement in which you receive your personal injury lawsuit award or settlement over time, you might be able to "cash out" the settlement. To do this, you sell some or all of your future payments in exchange for getting cash now.
Read on to learn what a structured settlement is, what it means to cash out your settlement annuity, and the process for doing so.
When you win or settle a personal injury suit, you may have a choice to take your award as a one-time lump sum payment or as a structured settlement, which is a series of smaller payments over a period of years. Many people choose a structured settlement for its tax advantages, to avoid difficulties of managing large sums, or to ensure a stream of income when it's needed most. (Learn more about structured settlements and whether you should choose one.)
Structured settlements are often designed to take into account the your future income needs, ongoing medical bills, your income from other sources, and other upcoming financial obligations like college tuition for your children. Structured settlements cannot, however, account for all financial challenges. Although your settlement may pay you $10,000 each year for 30 years, at some time during the payout period, you may wish to tap into those future payments to cover a present need.
In order to cash out your settlement annuity, you sell your right to receive certain payments that are due under your settlement agreement. The companies that buy the rights to these payments, and give you cash, are called factoring companies.
Example. Under the terms of your settlement agreement, you are paid $50,000 per year for 20 years. After ten years of payments, you need cash right away and cannot wait for your next settlement payments. You contact a factoring company. Under the agreement with the company, you get $20,000 in cash now and in return the factoring company will get your next two settlement payments, for years 11 and 12. Those payments total $100,000. Once the factoring company has received its two payments, the annuity payments revert back to you, and you will receive the payments for year 13 and beyond.
The commercials make the process sound quick and easy, but in almost every state you must get approval from a judge in order to sell your future payments to a factoring company. The review is designed to ensure that the request and the terms of the cash-out are in your best interest. The process, therefore, can take a month or more.
When you go before the judge, you will probably be required to justify your request. Using the money to pay medical bills or buy a new car may be acceptable. On the other hand, the judge may think that taking a luxury vacation or investing in your brother-in-law’s get-rich-quick scheme is not a good enough reason to sell future payments for less than their value. Even if you need the cash-out to pay ordinary living expenses, a court may be reluctant to approve your request.
The amount you can cash out of your future settlement payments depends on many factors. These can include:
Financial experts will encourage you to shop around and talk with several companies to get the best deal, remembering that the best deal is not necessarily the one that claims to be the fastest. Instead of relying on television ads, consult with your attorney or a financial planner for referrals to reputable companies. Your financial planner or attorney can also help you run the numbers to evaluate the consequences of selling your future payment stream.
Finally, consider looking for alternative sources for the cash you need before you commit to selling your settlement. If you have other assets, like a home with equity or a retirement account, it may be more cost effective for you to borrow against those assets than to cash-out a future guaranteed payment. Even personal loans or cash advances on your credit cards are likely to cost less if you are disciplined about paying them timely or using your future settlement installment to retire the debt.