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Why Is the Regulation of the Structured Settlement
Secondary Market Such a Good Idea
By Bob Thompson
Choose a Funder That Can Help Answer the Question How
often does the federal government pass a law regulating our right to
purchase something and get it just right? Very seldom, but in the case
of the structured settlement secondary market, that happened in 2002.
The subsequent passage of state laws provided specific guidance
regarding the purchase of structured settlement payment streams. The
entire business is now guided by a requirement to obtain court approval
of these cash flow transactions. Purchasers like Annuity Transfers, Ltd.
are required to provide notice to Interested Parties, primarily the
insurance companies responsible for issuing the cash flow being
purchased. The Interested Parties may oppose the transaction or simply
weigh in on the terms associated with the sale. A judge has full
discretion to deny the proposed purchase based on its relative fairness,
its economic consequences, and/or whether the seller understands the
consequences of the sale. Although the seller is liquidating something
just as they would a car or a house, the agreed upon price for future
settlement payments is formally scrutinized by third parties designated
by the law to play that critical role. These parties could potentially
nix the deal. An insurance company, for example, could object and
dissuade the judge from approving the transaction, or a judge could
simply say “no”.
Why is this a good thing? This mandated oversight forces the funder to
consider all of these potential factors when structuring the terms of
the deal. Doesn’t this added oversight cost time and money? Yes, but
consultants should know that the prudent funder will reduce the risk of
a transaction being denied by considering all of the risk factors up
front. A series of questions should be asked of the seller before
pushing a deal through the court approval process. Why is it important
for the seller to liquidate a guaranteed source of future income? What
is the positive outcome associated with receiving funds now rather than
later? Does the seller know that he or she will take a substantial
discount when receiving money now rather than waiting on the insurance
company to make payment according to the settlement schedule? Though
this approach may sound negative, it is essentially very positive. It is
important to remember the underlying circumstances associated with each
structured settlement cash flow. Future payments were awarded to a
settlement recipient for a reason. The original settlement claimant was
harmed in some way. They were compensated through the award of future
funds. The future payment stream always had a present value. Originally
the claimant accepted the future value, but now, for some good reason,
they have changed their mind. The law supports that decision. This is
why the laws governing this process are a good thing. Provided an
individual understands the consequences of their decision, and has good
reasons for pursuing the sale, he or she has the legal right to obtain
the present value of their original award.
A supportive and knowledgeable consultant, working with
a service-oriented funder, can leverage what is good about the law when
describing the process to the seller. Sellers of these payments need to
understand why it takes up to ten weeks to close the sale or why they
will need to answer questions for a judge. The specific questions and
answers are all positive, but there is one easy answer: You, the seller,
are protected by the law. You have nothing to worry about.
The partnership between a consultant and a funder should
promote, rather than complain about, legal requirements. Ultimately we
want the structured settlement payee to agree to the sale of his or her
payments. What better way to help convince that person than through a
detailed description of the process and the law, all of which exists to
protect the seller. A detailed description, including all potential
pitfalls, prepares the seller. Good preparation always wins out over a
good story. Of course, that presupposes that the funder, working with
the consultant, knows what they are talking about and has real
experience with insurance companies, judges, and the court system in
general. Information provided for the benefit of the seller will
ultimately benefit the funder, leading to faster closings and consultant
income. Annuity Transfers, Ltd. and I look forward to returning as
presenters at this year’s American Cash Flow Convention in San
Francisco. The topic will be “Structured Settlements: Wading Through
The *(%{\&!@)#!” We will present a long list of important details
associated with the structured settlement cash flow and discuss in
detail how those details may be used to your advantage when working with
a funding source. Don’t miss it!
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