Structured settlements are financial arrangements typically resulting from personal injury lawsuits or lottery winnings, providing recipients with regular payments over an extended period. While these arrangements offer financial security, there may be times when you need a lump sum of cash.
This article will explore whether you can borrow against your structured settlement, the options available, and important considerations to keep in mind.
Understanding structured settlements
Before diving into borrowing options, it’s crucial to understand what a structured settlement is:
- Definition: A structured settlement is an agreement to receive periodic payments over time instead of a lump sum.
- Purpose: To provide long-term financial stability and tax benefits.
- Legal status: Often protected by federal and state laws to ensure the recipient’s financial security.
The short answer
In most cases, you cannot directly borrow against your structured settlement in the traditional sense. Structured settlements are designed to be protected from creditors and cannot be used as collateral for a loan. However, there are alternative options to access funds from your structured settlement.
Selling payments (factoring)
While not technically borrowing, selling future payments is the most common way to access funds from a structured settlement.
- Process: You sell some or all of your future payments to a factoring company and the company provides a lump sum in exchange for these payments. This process is regulated by state and federal laws, including the Structured Settlement Protection Act.
- Considerations: You’ll receive less than the total value of the payments sold due to discounting. The transaction must be approved by a judge to ensure it’s in your best interest. This option permanently reduces or eliminates future payments.
Structured settlement advance
Some companies offer advances on structured settlements, which function similarly to selling payments but may be marketed as a form of borrowing.
- How it works: You receive a lump sum in exchange for a portion of your future payments and the advance is repaid through these redirected payments.
- Considerations: Often comes with high fees and effective interest rates and still requires court approval in most cases. May be less regulated than traditional factoring transactions.
Personal loans
While you can’t use the structured settlement as collateral, you might qualify for a personal loan based on your overall financial situation.
- Considerations: Approval depends on your credit score, income, and other factors. Interest rates may be high, especially for unsecured loans, but it doesn’t directly impact your structured settlement.
Home equity loans or lines of credit
If you own a home with equity, this could be an option to access funds without affecting your structured settlement.
- Considerations: Puts your home at risk if you can’t repay the loan but may offer lower interest rates than unsecured loans. Requires sufficient home equity and income to qualify.
Factors to consider before accessing structured settlement funds
Keep these in mind to make an informed decision…
- Long-term financial impact: Selling payments or taking advances reduces future income. Consider how this will affect your long-term financial stability.
- Tax implications: Lump sums from selling payments may be taxable, unlike the tax-free structured settlement payments. Consult a tax professional to understand the implications.
- Immediate need vs. long-term security: Evaluate whether the immediate need justifies potentially compromising long-term financial security.
- Legal requirements: Understand that selling payments typically requires court approval. The judge will assess whether the transaction is in your best interest.
- Discount rates: Be aware that factoring companies apply significant discount rates, meaning you’ll receive less than the face value of your payments.
- Partial vs. full sale: Consider selling only a portion of your payments to maintain some future income.
- Consumer protections: Familiarize yourself with the Structured Settlement Protection Act and your state’s specific laws.
- Professional advice: Consult with a financial advisor or attorney before making any decisions.
Steps to take before accessing structured settlement funds
- Assess your financial situation: Clearly define why you need the funds and explore all alternatives.
- Research factoring companies: If selling payments, compare offers from multiple reputable companies.
- Understand the terms: Carefully review all terms, including discount rates and any fees.
- Seek professional advice: Consult with a financial advisor, attorney, or structured settlement expert.
- Prepare for court approval: If selling payments, be ready to explain to a judge why this is in your best interest.
- Review all paperwork: Carefully read and understand all documents before signing.
- Plan for tax implications: Set aside funds for potential tax liabilities if applicable.
The takeaway
While directly borrowing against a structured settlement is typically not possible, there are options to access funds if needed. The most common method is selling future payments, but this comes with some long-term implications and requires careful consideration.
Before making any decisions about your structured settlement, it’s crucial to thoroughly assess your financial situation, explore all alternatives, and seek professional advice. Remember that structured settlements are designed to provide long-term financial security, and altering this arrangement should be done only after you’ve educated yourself on the entire process.
Let Peachtree help*
At Peachtree Financial Solutions, we’ve helped thousands of people get their money sooner by purchasing their future payments for a lump sum of cash. Selling your payments is a regulated process and we have a lot of experience with these transactions. And while every structured settlement is unique, which means every payment sale will be different, they all have the same basic six steps:
- Call one of our representatives.
- Receive a free, no-obligation quote for the sale of your payments.
- Review and sign the purchase agreement.
- We process the agreement with your insurance company and local court.
- A judge reviews the transaction and, if approved.
- You get your cash!
Why should you choose Peachtree?
It’s all part of something we call the Peachtree Promise: our experienced, dedicated representatives listen to your goals and clearly explain your available options. We meet you where you are without judgement and work hard to help you meet your financial goals. Getting your quote is completely free, and you’re under no obligation to sell to us if you aren’t completely satisfied with what you hear.
*Sales of Structured Settlement and Lottery Payments are subject to Court Approval and other conditions which can take 60-90 days to complete. Annuity payment sales are also subject to certain conditions. All transactions are at our sole discretion.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
