The Structured Settlement Protection Act has a number of sections and it depends on you as to how you cash the act for your benefit. can be of help are mentioned below:
Selling or transferring the settlement payments: If you wish then you could opt to sell the settlement payments as a part of the act. There are professional companies in the market that take interest in buying payments from you. They offer you lump sum money in return of you selling them the right of your settlement. However, this is done only after the consent of both the parties.
It is also important that you compare the different offers that can be tentatively available for you when you sell the settlement payments and then apply for the one that offers you the best deal. Selling settlement payments can happen in a number of cases like when you are in an urgent need of lump sum cash; the payer of the structured settlement is filing for bankruptcy etc. In such cases you can sell the settlement payments to a firm who can later on collect the money from the payer and you can get the amount that you should have got.
The Structured Settlement Protection Act has been framed in public interest and has safeguarded the interests of the person who is receiving the structured payments. The company that is buying your settlement payments would definitely look for its own advantage and hence it is important that you take advice from a financial consultant who can guide you and have your rights protected.
Payment should be approved by the State Court: To make it advantageous for the person receiving settlement payments the transaction that is supposed to undergo settlement should be approved by the state court so that it can be determined whether the settlement is in the benefit of the receiver or not.
Getting lump sum payments: The Structured Settlement Protection Act calls for the client to get professional financial consulting after getting every transaction from the payer to know what future effect it would have on his/her life. Also you can opt to get the entire settlement as lump sum payment.
The structured settlement protection act is formed by; keeping in mind the benefit of the client but it is always advised that you seek professional help before taking any decision regarding your structured payments.
To read the full article, click How the Structured Settlement Protection Act Can Help You
Sunday, September 13, 2009
Sunday, September 6, 2009
Guide to Structured Settlement: CERTIFIED CONSULTANTS
Guide in Choosing a CERTIFIED STRUCTURED SETTLEMENT CONSULTANT
When getting a structured settlement, it is usually necessary to get a certified structured settlement consultant. These professionals know all about structured settlements, and they will fight to get the very best settlement in their client's case. Structured pay outs often result following an accident resulting in disability or injury or following a wrongful death. Regardless of the client's needs or circumstances, a structured settlement expert will be able to get a pay out plan that suits their client's budget. Before anyone calls a professional out of the phone book, though, it's important that they explore their options between lump sum and a structured settlement. They will also need to consider if the expert they choose is going to work hardest for them or not. After all, their pay out is only as good as their settlement consultant or expert.
A person who has been injured in an accident recently and is now seeking compensation might want to consider a structured settlement. With it, they will receive that compensation in payments rather than in one lump sum. A certified structured settlement consultant will say that this tends to be a better pay out plan than lump sum for several reasons. First, most structured pay outs are tax free. Also, since pay out is made over time, the money doesn't all disappear at once. Spending is easy to do when one has the money right in front of them. People also feel more generous when they have more money. The client will spend less if they take on a structured pay off. If the party who is due the settlement happens to be a minor, it might be better to have a structured pay out. Minors tend to be less frugal and may want to splurge rather than save for the future. In addition, the structured settlement expert will say that there is less worry about investing or holding your lump sum with a structured pay off. A lump sum can be subject to taxes and investment losses.
Once a potential client has decided that they want a structured settlement, they need to locate the right structured settlement expert. The professional needs to be able to calculate the client's costs and future expenses due to the incident that left them as victim. They need to be professional and reputable. This can be tricky because today so many consultants have a hidden agenda and actually have ties to the insurance industry. Potential clients will need to make sure that their certified structured settlement consultant has no affiliations with insurance companies and have the client as their priority. Make sure the expert doesn't work for liability carriers, doesn't represent the structure annuity carriers and doesn't support either of those types of carriers. Look for a consultant that offers a sworn affidavit stating that they have no ties to the insurance industry. Also, look online for reviews or comments about the companies of interest. Find out if there are any complaints against them with the Better Business Bureau.
One can find a certified structured settlement consultant either locally or through the Internet. There are companies that work exclusively to get their clients' structured settlements. Ask people if they recommend anyone. A potential client can also ask their lawyer to set them up with a good structured settlement expert. They usually have contacts in that area. The client can also look online for consulting firms that handle settlements. Watch out for scams, though. Keep in mind that clients cannot return to a lump sum after they take on a structured pay off. Be especially aware of offers for turning a settlement into cash payments. These can be costly. If a client foresees a time when they think they will need a good portion of their settlement up front, they should go ahead and take the lump sum. Otherwise, they will lose much of their settlement trying to get cash from a company for their settlement. No matter how your structured pay off turns out, though, you much remember that money only feels like a security blanket. True security is found in God. "He that trusteth in his riches shall fall; but the righteous shall flourish as a branch" (Proverbs 11:28).
The best structured settlement expert is...
To read the full article, click Certified Structure Settlement Consultants
When getting a structured settlement, it is usually necessary to get a certified structured settlement consultant. These professionals know all about structured settlements, and they will fight to get the very best settlement in their client's case. Structured pay outs often result following an accident resulting in disability or injury or following a wrongful death. Regardless of the client's needs or circumstances, a structured settlement expert will be able to get a pay out plan that suits their client's budget. Before anyone calls a professional out of the phone book, though, it's important that they explore their options between lump sum and a structured settlement. They will also need to consider if the expert they choose is going to work hardest for them or not. After all, their pay out is only as good as their settlement consultant or expert.
A person who has been injured in an accident recently and is now seeking compensation might want to consider a structured settlement. With it, they will receive that compensation in payments rather than in one lump sum. A certified structured settlement consultant will say that this tends to be a better pay out plan than lump sum for several reasons. First, most structured pay outs are tax free. Also, since pay out is made over time, the money doesn't all disappear at once. Spending is easy to do when one has the money right in front of them. People also feel more generous when they have more money. The client will spend less if they take on a structured pay off. If the party who is due the settlement happens to be a minor, it might be better to have a structured pay out. Minors tend to be less frugal and may want to splurge rather than save for the future. In addition, the structured settlement expert will say that there is less worry about investing or holding your lump sum with a structured pay off. A lump sum can be subject to taxes and investment losses.
Once a potential client has decided that they want a structured settlement, they need to locate the right structured settlement expert. The professional needs to be able to calculate the client's costs and future expenses due to the incident that left them as victim. They need to be professional and reputable. This can be tricky because today so many consultants have a hidden agenda and actually have ties to the insurance industry. Potential clients will need to make sure that their certified structured settlement consultant has no affiliations with insurance companies and have the client as their priority. Make sure the expert doesn't work for liability carriers, doesn't represent the structure annuity carriers and doesn't support either of those types of carriers. Look for a consultant that offers a sworn affidavit stating that they have no ties to the insurance industry. Also, look online for reviews or comments about the companies of interest. Find out if there are any complaints against them with the Better Business Bureau.
One can find a certified structured settlement consultant either locally or through the Internet. There are companies that work exclusively to get their clients' structured settlements. Ask people if they recommend anyone. A potential client can also ask their lawyer to set them up with a good structured settlement expert. They usually have contacts in that area. The client can also look online for consulting firms that handle settlements. Watch out for scams, though. Keep in mind that clients cannot return to a lump sum after they take on a structured pay off. Be especially aware of offers for turning a settlement into cash payments. These can be costly. If a client foresees a time when they think they will need a good portion of their settlement up front, they should go ahead and take the lump sum. Otherwise, they will lose much of their settlement trying to get cash from a company for their settlement. No matter how your structured pay off turns out, though, you much remember that money only feels like a security blanket. True security is found in God. "He that trusteth in his riches shall fall; but the righteous shall flourish as a branch" (Proverbs 11:28).
The best structured settlement expert is...
To read the full article, click Certified Structure Settlement Consultants
Sunday, August 30, 2009
Guide to Structured Settlement: FACTORING AUDIT TECHNIQUE GUIDE
Structured settlements are settlements of tort claims involving physical injuries or physical sickness, and workers’ compensation claims, under which settlement proceeds take the form of periodic payments, including scheduled lump sum payments. Structured settlements generally are funded by single-premium annuity contracts held by the party that is contractually obligated to make the future settlement payments. Under federal tax rules designed to encourage the use of structured settlements, the full amount of each periodic payment, including the amount attributable to earnings under the annuity contract, is excludable from the settlement recipient’s income under IRC section 104(a)(1) or (2). Congress has endorsed the use of structured settlement as a means of assuring continuing income to injury victims and minimizing the risk that lump sum recoveries will be dissipated, leaving victims of disabling injuries to fall back on public assistance.
Consistent with the congressional policy favoring the use of structured settlements, and for reasons linked to their tax treatment, structured settlement agreements typically provide that a settlement recipient’s rights to receive future payments may not be assigned or otherwise transferred. In some cases, transfers of payment rights are also restricted or prohibited under applicable statutes or court orders. Notwithstanding these restrictions, an active secondary market in structured settlement payment rights developed in the early 1990s. Through aggressive advertising, specialized finance companies – now commonly referred to as factoring companies – began persuading structured settlement recipients (referred to herein as “payees”) to trade future payments for present cash.
To circumvent the restrictions on assignment of payment rights, factoring companies arranged for payees to redirect their payments to factoring company addresses. The factoring companies would then collect the payments (endorsing checks in the payee’s names, using powers of attorney and signature stamps) without informing insurers that payment rights had been assigned.
Many payees who dealt with factoring companies were exploited. By fashioning transactions as purchases of future payment rights or as loans originated in states with generous usury laws, factoring companies often charged sharp discounts to payees who were ill equipped to appreciate the value of their future payments or to understand the onerous terms of factoring agreements. In some cases, factoring companies charged discounts equivalent to annual interest rates as high as 70 percent. Payees who defaulted often were sued in remote forums specified in the factoring companies’ form contracts. In many cases, these actions commenced with entry of confessed judgments against payees. Insurers responsible for making ostensibly nonassignable settlement payments became embroiled in collection actions brought by factoring companies. Insurers also faced uncertain tax consequences and risks of multiple liability when assigned settlement payments became subject to competing claims.
Wanna read more? Click Structured Settlement Factoring Audit Technique Guide
Consistent with the congressional policy favoring the use of structured settlements, and for reasons linked to their tax treatment, structured settlement agreements typically provide that a settlement recipient’s rights to receive future payments may not be assigned or otherwise transferred. In some cases, transfers of payment rights are also restricted or prohibited under applicable statutes or court orders. Notwithstanding these restrictions, an active secondary market in structured settlement payment rights developed in the early 1990s. Through aggressive advertising, specialized finance companies – now commonly referred to as factoring companies – began persuading structured settlement recipients (referred to herein as “payees”) to trade future payments for present cash.
To circumvent the restrictions on assignment of payment rights, factoring companies arranged for payees to redirect their payments to factoring company addresses. The factoring companies would then collect the payments (endorsing checks in the payee’s names, using powers of attorney and signature stamps) without informing insurers that payment rights had been assigned.
Many payees who dealt with factoring companies were exploited. By fashioning transactions as purchases of future payment rights or as loans originated in states with generous usury laws, factoring companies often charged sharp discounts to payees who were ill equipped to appreciate the value of their future payments or to understand the onerous terms of factoring agreements. In some cases, factoring companies charged discounts equivalent to annual interest rates as high as 70 percent. Payees who defaulted often were sued in remote forums specified in the factoring companies’ form contracts. In many cases, these actions commenced with entry of confessed judgments against payees. Insurers responsible for making ostensibly nonassignable settlement payments became embroiled in collection actions brought by factoring companies. Insurers also faced uncertain tax consequences and risks of multiple liability when assigned settlement payments became subject to competing claims.
Wanna read more? Click Structured Settlement Factoring Audit Technique Guide
Thursday, August 27, 2009
Guide to Structured Settlement: INVESTMENT
Choosing a structured settlement investment as an option for for financial gain can be a viable method of acquiring profit. These settlements are usually paid out to individuals over a period of time and may be the result of an insurance pay out, lottery winnings, annuities or a court judgment. Recipients of these funds are often willing to sell the payments in exchange for a lump sum of cash. There are a variety of reasons why an individual might choose to do this. Receiving money that is owed over time in small increments may not have the same kind of life changing possibilities that a one time payment of a large amount of money can have. This is the main attraction that draws individuals to investors who are willing to pay money for structured settlement payments. Why wait for the money when it can be obtained in one large payment? Of course, sellers will find that they are not going to receive as much money as originally would have been the case. For a structured settlement investment to work, there must be the potential of real profit down the road for the investor. These settlements may have been originally designed to create a steady source of income that will aide the beneficiary for a long time to come. This time frame will usually extend over a period of years. In the minds of some recipients, having access to a larger sum of money in the present is more valuable than having more money in the long run, but having to wait for it.
The decision to participate in a structured settlement investment can depend upon a variety of factors. Individuals who are weighing an offer to sell off any payments that will come in the future are generally more concerned about the present. Pressing financial needs can be very persuasive for the owners of these settlements. Mounting debts, needed home repairs, medical bills, or a child's education can be just some of the reasons that someone might decide to sell off future payments. But the wise seller will take a number of things into consideration. It is generally a good idea to seek counseling from an objective financial professional before making a final decision or signing any contracts. This professional should be functioning independently of any investors and have only the best interests of the seller at heart. Such counselors will usually help a client to understand just how much money will be lost should the client decide to move forward with a structured settlement investment. Advisers will also suggest certain pertinent questions to the client. How much money does the client currently need? Is this need so pressing that it is worth sacrificing future income? Is there any other way that the needed money can be obtained? Since the client will end us loosing a percentage of the settlement's worth, the seller should take the time to weigh all options and to decide if the future cost of the arrangement is worth the present day benefits.
A a structured settlement investment requires a little more than a willing buyer paired with a willing seller. While such arrangements can be a financial opportunity for both parties, the law does not allow individuals to sell off such assets without court approval. Involving a judge is designed to make sure that the seller fully understands what is being sacrificed and that the deal as it is presented is fair and equitable to all concerned. When the request is brought before the court, the seller's current situation and financial need will be presented as well. In addition to the input of a judge, separate legal representation may be called for. Many clients do not realize that they may be able to sell off only a portion of these settlements and are not obligated to sell the entire asset. This approach may offer a client the best alternative since they will be able to obtain cash for current needs while maintaining a portion of the payments that will be paid out over time. This choice can help to provide a sense of security for the future. It is also very important to make sure that the buyer or group of investors who are offering to complete the structured settlement investment are reputable and that there are no hidden fees buried in the agreement.
Selecting a reputable broker who can lead a client through the process of working with a structured settlement investment groups is a very crucial choice. A broker will need to be knowledgeable of the law as it pertains to these contracts. In addition, a broker must also hold the best interests of their clients as a top priority. The strength and comfort that God offers to believers is detailed in the Bible. "Fear thou not; for I am with thee: be not dismayed; for I am thy God: I will strengthen thee; yea, I will help thee; yea, I will uphold thee with the right hand of my righteousness." (Isaiah 41:10)
To read the full article, click on Structured Settlement Investment Article
The decision to participate in a structured settlement investment can depend upon a variety of factors. Individuals who are weighing an offer to sell off any payments that will come in the future are generally more concerned about the present. Pressing financial needs can be very persuasive for the owners of these settlements. Mounting debts, needed home repairs, medical bills, or a child's education can be just some of the reasons that someone might decide to sell off future payments. But the wise seller will take a number of things into consideration. It is generally a good idea to seek counseling from an objective financial professional before making a final decision or signing any contracts. This professional should be functioning independently of any investors and have only the best interests of the seller at heart. Such counselors will usually help a client to understand just how much money will be lost should the client decide to move forward with a structured settlement investment. Advisers will also suggest certain pertinent questions to the client. How much money does the client currently need? Is this need so pressing that it is worth sacrificing future income? Is there any other way that the needed money can be obtained? Since the client will end us loosing a percentage of the settlement's worth, the seller should take the time to weigh all options and to decide if the future cost of the arrangement is worth the present day benefits.
A a structured settlement investment requires a little more than a willing buyer paired with a willing seller. While such arrangements can be a financial opportunity for both parties, the law does not allow individuals to sell off such assets without court approval. Involving a judge is designed to make sure that the seller fully understands what is being sacrificed and that the deal as it is presented is fair and equitable to all concerned. When the request is brought before the court, the seller's current situation and financial need will be presented as well. In addition to the input of a judge, separate legal representation may be called for. Many clients do not realize that they may be able to sell off only a portion of these settlements and are not obligated to sell the entire asset. This approach may offer a client the best alternative since they will be able to obtain cash for current needs while maintaining a portion of the payments that will be paid out over time. This choice can help to provide a sense of security for the future. It is also very important to make sure that the buyer or group of investors who are offering to complete the structured settlement investment are reputable and that there are no hidden fees buried in the agreement.
Selecting a reputable broker who can lead a client through the process of working with a structured settlement investment groups is a very crucial choice. A broker will need to be knowledgeable of the law as it pertains to these contracts. In addition, a broker must also hold the best interests of their clients as a top priority. The strength and comfort that God offers to believers is detailed in the Bible. "Fear thou not; for I am with thee: be not dismayed; for I am thy God: I will strengthen thee; yea, I will help thee; yea, I will uphold thee with the right hand of my righteousness." (Isaiah 41:10)
To read the full article, click on Structured Settlement Investment Article
Tuesday, August 25, 2009
Guide to Structured Settlement: HOW TO SELL A STRUCTURED SETTLEMENT
Step 1
~Know the terms of the structured settlement~
Put rather simply, structured settlements are monetary awards which are structured into a payment schedule instead of a lump sum. Most structured settlements are awarded as a result of winning a law suit for either harassment, malpractice, liability or personal injury. Some settlements may be set up as an annuity which pays you a monthly sum for the rest of your life.
Read and understand your settlement so you're aware of the exact terms. Know when the payments will occur and what the full payout would be at the end of the structured payment term.
Step 2
~Understand the transfer terms of your settlement~
About 2/3 of the US states have set in place laws and requirements regarding structured settlements. It might not be possible for you to sell so do your research before you start dreaming of that new yacht. But, if you can sell....
Step 3
~Decide if you can wait for the structured settlement payout~
If you can afford to wait for the payout as documented by the court settlement, you're probably better off waiting. Selling your settlement means that you'll realize money NOW but it could be a lot less money than you would have if you were to adhere to the terms of the law settlement. Also, holding onto your structured award could be insurance against being poor in the future!
Step 4
~Conduct internet research on companies that buy structured settlements and shop around~
There are a multitude of organizations which will buy structured settlements such as stonestreet.com or woodbridgeinvestments.com. Contact a minimum of three companies so you have a fair comparison and are sure you're getting the highest payout.
Step 5
~Consider the tax advantages of staying with the structured settlement~
Frequently, there is a tax benefit to receiving the settlement monthly or even a lump sum every few years. Some annuities are set up so that they are tax-free. If you do choose to sell the settlement though, you could end up paying a boatload in taxes so just beware.
Step 6
~Bargain, bargain, bargain~
Do not take the first amount you're offered for selling your awarded settlement. There's no law that says you can't ask for more. When you get an offer, do not take it without thinking long and hard about the benefits and the negatives of accepting the offer.
Source: How to Sell a Structured Settlement
~Know the terms of the structured settlement~
Put rather simply, structured settlements are monetary awards which are structured into a payment schedule instead of a lump sum. Most structured settlements are awarded as a result of winning a law suit for either harassment, malpractice, liability or personal injury. Some settlements may be set up as an annuity which pays you a monthly sum for the rest of your life.
Read and understand your settlement so you're aware of the exact terms. Know when the payments will occur and what the full payout would be at the end of the structured payment term.
Step 2
~Understand the transfer terms of your settlement~
About 2/3 of the US states have set in place laws and requirements regarding structured settlements. It might not be possible for you to sell so do your research before you start dreaming of that new yacht. But, if you can sell....
Step 3
~Decide if you can wait for the structured settlement payout~
If you can afford to wait for the payout as documented by the court settlement, you're probably better off waiting. Selling your settlement means that you'll realize money NOW but it could be a lot less money than you would have if you were to adhere to the terms of the law settlement. Also, holding onto your structured award could be insurance against being poor in the future!
Step 4
~Conduct internet research on companies that buy structured settlements and shop around~
There are a multitude of organizations which will buy structured settlements such as stonestreet.com or woodbridgeinvestments.com. Contact a minimum of three companies so you have a fair comparison and are sure you're getting the highest payout.
Step 5
~Consider the tax advantages of staying with the structured settlement~
Frequently, there is a tax benefit to receiving the settlement monthly or even a lump sum every few years. Some annuities are set up so that they are tax-free. If you do choose to sell the settlement though, you could end up paying a boatload in taxes so just beware.
Step 6
~Bargain, bargain, bargain~
Do not take the first amount you're offered for selling your awarded settlement. There's no law that says you can't ask for more. When you get an offer, do not take it without thinking long and hard about the benefits and the negatives of accepting the offer.
Source: How to Sell a Structured Settlement
Sunday, August 23, 2009
Guide to Structured Settlements: FACTORING
Structured Settlements Factoring Terminology: BEST INTEREST STANDARD
Internal Revenue Code Sec. 5891 and most state laws require that a court find that a proposed settlement factoring transaction be in the best interest of the seller, taking into account the welfare and support of any dependents. “Best interest” is generally not defined, which gives judges flexibility to make a subjective determination on a case-by-case basis. Some state laws may require that the judge look at factors such as the “purpose of the intended use of the funds,” the payee’s mental and physical capacity, and the seller’s potential need for future medical treatment. One Minnesota court described the “best interest standard” as a determination involving “a global consideration of the facts, circumstances, and means of support available to the payee and his or her dependents.”
Courts have consistently found that the “best interest standard” is not limited to financial hardship cases. Hence, a transfer may be in a seller’s best interest because it allows him to take advantage of an opportunity (i.e., buy a new home, start a business, attend college, etc.) or to avoid disaster (i.e., pay for a family member’s unexpected medical care, pay off mounting debt, etc.). For example, a New Jersey court found that a transaction was in a seller’s best interest where the funds were used to “pay off bills…and to buy a home and get married.”
Although sometimes criticized for being vague, the best interest standard’s lack of precise definition allows considerable latitude in judicial review. Courts can consider on a case-by-case basis the totality of the circumstances surrounding the transfer to determine whether it should be approved.
Structured Settlements Factoring Terminology: DISCOUNT RATE
n the beginning, the factoring industry had some relatively high discount rates due to heavy expenses caused by costly litigation battles and limited access to traditional investors. However, once state and federal legislation was enacted, the industry’s interest rates decreased dramatically. There is much confusion with the terminology “discount rate” because the term is used in different ways. The discount rate referred to in a factoring transaction is similar to an interest rate associated with home loans, credit cards and car loans where the interest rate is applied to the payment stream itself. In a factoring transaction, the factoring company knows the payment stream they are going to purchase and applies an interest rate to the payment stream itself and solves for the funding amount, as though it was a loan. Discount rates from factoring companies to consumers can range anywhere between 13% up to over 18% but usually average somewhere in the middle (link to a discount rate calculator can be found here). Factoring discount rates can be a bit higher when compared to home loan interest rates, due to the fact the factoring transactions are more of a boutique product for investors opposed to the mainstream collateralized mortgage transactions. One common mistake in calculating the discount rate is to use “elementary school math” where you take the funding/loan amount and divide it by the total price of all the payments being purchased. Because this method disregards the concept of time (and the time value of money), the resulting percentage is useless. For example, the court in In Re Henderson Receivables Origination v. Campos noted an annual discount rate of 16.8% where the annuitant received $36,500 for the assignment of payments totaling $63,364.94 over 84 months (two monthly payments of $672.32 each, beginning September 30, 2006 and ending on October 31, 2006; eighty-two monthly payments of $692.49 each, increasing 3% every twelve months, beginning on November 30, 2006 and ending on August 31, 2013). However, had the court in Henderson Receivables Origination applied the illogical formula of discounting from “elementary school math” ($36,500/ $63,364.94), the discount rate would have been an astronomical (and nonsensical) 61%.
Structured Settlements Factoring Terminology: DISCOUNTED PRESENT VALUE
Another term commonly used in factoring transactions is “discounted present value,” which is defined in the NCOIL model transfer act as “the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.” The IRS discount rate, also known as the Applicable Federal Rate (AFR), is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The rate is the annual rate of return that the IRS assumes the gift assets will earn during the gift term. The IRS discount rate is published monthly (link to current rate may be found here). In Henderson Receivables Origination (above), the court calculated the discounted present value of the $63,364.94 to be transferred as $50,933.18 based on the applicable federal rate of 6.00%. The “discounted present value” is a measuring stick for determining what the value of a future payment (i.e., a payment that is due in the year 2057) is today. Hence, the discounted present value of a payment corrects for inflation and the principle that money available today is worth more than money not accessible for 50 years (or some future time). However, the discounted present value is not the same thing as market value (what someone is willing to pay). Basically, a calculation that discounts a future payment based on IRS rates is an artificial number since it has no bearing on the payment’s actual selling price. For example, in Henderson Receivables Origination, it is somewhat confusing for the court to evaluate future payments totaling $63,364,94 based the discounted present value of $50,933.18 because that is not the market value of the payments. In other words, the annuitant couldn’t go out and get $50,933.18 for his future payments because no person or company would be willing to pay that much. Some states will require a quotient to be listed on the disclosure that is sent to the customer prior to entering into a contract with a factoring company. The quotient is calculated by dividing the purchase price by the discounted present value. The quotient (like the discounted present value) provides no relevance in the pricing of a settlement factoring transaction. In Henderson Receivables Origination (above), the court did consider this quotient which was calculated as 71.70% ($36,500/ $50,933.18).
SOURCE: Structured Settlement Factoring Transaction by Wikipedia.org
Internal Revenue Code Sec. 5891 and most state laws require that a court find that a proposed settlement factoring transaction be in the best interest of the seller, taking into account the welfare and support of any dependents. “Best interest” is generally not defined, which gives judges flexibility to make a subjective determination on a case-by-case basis. Some state laws may require that the judge look at factors such as the “purpose of the intended use of the funds,” the payee’s mental and physical capacity, and the seller’s potential need for future medical treatment. One Minnesota court described the “best interest standard” as a determination involving “a global consideration of the facts, circumstances, and means of support available to the payee and his or her dependents.”
Courts have consistently found that the “best interest standard” is not limited to financial hardship cases. Hence, a transfer may be in a seller’s best interest because it allows him to take advantage of an opportunity (i.e., buy a new home, start a business, attend college, etc.) or to avoid disaster (i.e., pay for a family member’s unexpected medical care, pay off mounting debt, etc.). For example, a New Jersey court found that a transaction was in a seller’s best interest where the funds were used to “pay off bills…and to buy a home and get married.”
Although sometimes criticized for being vague, the best interest standard’s lack of precise definition allows considerable latitude in judicial review. Courts can consider on a case-by-case basis the totality of the circumstances surrounding the transfer to determine whether it should be approved.
Structured Settlements Factoring Terminology: DISCOUNT RATE
n the beginning, the factoring industry had some relatively high discount rates due to heavy expenses caused by costly litigation battles and limited access to traditional investors. However, once state and federal legislation was enacted, the industry’s interest rates decreased dramatically. There is much confusion with the terminology “discount rate” because the term is used in different ways. The discount rate referred to in a factoring transaction is similar to an interest rate associated with home loans, credit cards and car loans where the interest rate is applied to the payment stream itself. In a factoring transaction, the factoring company knows the payment stream they are going to purchase and applies an interest rate to the payment stream itself and solves for the funding amount, as though it was a loan. Discount rates from factoring companies to consumers can range anywhere between 13% up to over 18% but usually average somewhere in the middle (link to a discount rate calculator can be found here). Factoring discount rates can be a bit higher when compared to home loan interest rates, due to the fact the factoring transactions are more of a boutique product for investors opposed to the mainstream collateralized mortgage transactions. One common mistake in calculating the discount rate is to use “elementary school math” where you take the funding/loan amount and divide it by the total price of all the payments being purchased. Because this method disregards the concept of time (and the time value of money), the resulting percentage is useless. For example, the court in In Re Henderson Receivables Origination v. Campos noted an annual discount rate of 16.8% where the annuitant received $36,500 for the assignment of payments totaling $63,364.94 over 84 months (two monthly payments of $672.32 each, beginning September 30, 2006 and ending on October 31, 2006; eighty-two monthly payments of $692.49 each, increasing 3% every twelve months, beginning on November 30, 2006 and ending on August 31, 2013). However, had the court in Henderson Receivables Origination applied the illogical formula of discounting from “elementary school math” ($36,500/ $63,364.94), the discount rate would have been an astronomical (and nonsensical) 61%.
Structured Settlements Factoring Terminology: DISCOUNTED PRESENT VALUE
Another term commonly used in factoring transactions is “discounted present value,” which is defined in the NCOIL model transfer act as “the present value of future payments determined by discounting such payments to the present using the most recently published Applicable Federal Rate for determining the present value of an annuity, as issued by the United States Internal Revenue Service.” The IRS discount rate, also known as the Applicable Federal Rate (AFR), is used to determine the charitable deduction for many types of planned gifts, such as charitable remainder trusts and gift annuities. The rate is the annual rate of return that the IRS assumes the gift assets will earn during the gift term. The IRS discount rate is published monthly (link to current rate may be found here). In Henderson Receivables Origination (above), the court calculated the discounted present value of the $63,364.94 to be transferred as $50,933.18 based on the applicable federal rate of 6.00%. The “discounted present value” is a measuring stick for determining what the value of a future payment (i.e., a payment that is due in the year 2057) is today. Hence, the discounted present value of a payment corrects for inflation and the principle that money available today is worth more than money not accessible for 50 years (or some future time). However, the discounted present value is not the same thing as market value (what someone is willing to pay). Basically, a calculation that discounts a future payment based on IRS rates is an artificial number since it has no bearing on the payment’s actual selling price. For example, in Henderson Receivables Origination, it is somewhat confusing for the court to evaluate future payments totaling $63,364,94 based the discounted present value of $50,933.18 because that is not the market value of the payments. In other words, the annuitant couldn’t go out and get $50,933.18 for his future payments because no person or company would be willing to pay that much. Some states will require a quotient to be listed on the disclosure that is sent to the customer prior to entering into a contract with a factoring company. The quotient is calculated by dividing the purchase price by the discounted present value. The quotient (like the discounted present value) provides no relevance in the pricing of a settlement factoring transaction. In Henderson Receivables Origination (above), the court did consider this quotient which was calculated as 71.70% ($36,500/ $50,933.18).
SOURCE: Structured Settlement Factoring Transaction by Wikipedia.org
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