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When you accepted your structured settlement, you were locked into a contractual agreement with the defendant in your personal injury lawsuit that specified a schedule of tax-exempt periodic payments. These payments, which were intended to provide long-term financial security in the event that your injuries prevented you from earning an income, have most likely been issued by a life insurance company through an annuity.
Now, though, your finances are stable and you want to sell your structured settlement. But first, you need the court’s permission.
Why Do I Need Court Approval to Sell My Settlement?
State and federal laws, known collectively as Structured Settlement Protection Acts, protect structured settlement holders from predatory practices in the secondary structured settlement market.
The secondary market refers to the purchase of existing structured settlement payment rights. Factoring companies, or structured settlement buyers, are legitimate businesses that offer a discounted lump sum in exchange for the rights to the seller’s future payments. There is nothing inherently insidious about the secondary market when all parties are informed and transparent.
The problem arises when bad actors enter the picture. Unethical settlement buyers use high-pressure tactics to persuade structured settlement recipients to sell their payments, regardless of whether doing so is in their best interests.
That’s also where the courts come in. The court-approval requirement keeps these corrupt dealers in check, inhibiting predatory strategies and deterring companies from using intimidation, coercion or other abusive business practices.
Structured settlement recipients may be especially vulnerable to these tactics because their contracts can be complex and the legal and financial jargon only add to the confusing nature of structured settlement transfers.
When you add the stress and anxiety of a possible financial crisis, even a savvy consumer can make a mistake.
Regulations and the Best Interest Standard
The “best interest” standard refers to the judge’s responsibility to the structured settlement seller.
The National Council of Insurance Legislators’ (NCOIL) model law for state structured settlement protection acts stipulates that transfers of structured settlement payment rights may not be approved unless the court finds that “the transfer is in the best interest of the payee, taking into account the welfare and support of the payee’s dependents.”
Additional regulation of structured settlements was enacted in 2001. The Victims of Terrorism Tax Relief Act of 2001 imposed a 40 percent excise tax on factoring companies that profited from the purchase of structured settlements.
The law had no effect on the tax treatment of the structured settlement for the recipient. According to the Periodic Payment Settlement Act of 1982, income from a structured settlement is exempt from taxation, just as the income from lump-sum settlements is exempt.
It did, however, have the undesirable effect of limiting the ability of structured settlement recipients to fully control their own finances.
How Can I Improve My Chances of Approval?
The judge is more likely to approve the sale of your structured settlement if you can demonstrate that you have a valid reason for selling and that you understand the terms of your sale and the impact it could have on your financial well-being.
In addition to hiring a competent structured settlement attorney, come prepared to answer questions about the transfer itself, any medical expenses you may incur, and any dependents in your care.
- Have you compared the quote from the factoring company to quotes from its competitors?
- Are you confident in the buyer’s reputation?
- Are you aware that you will receive less money by selling now than you would if you waited for the installment payments?
- Do you fully understand the transfer agreement?
- Has the agreement been reviewed by an attorney or other professional advisor who is not working for the purchasing company?
The judge may even ask what you plan to do with the money.
Don’t let this question cause you anxiety. Just remember that the judge is looking out for your best interest. You’ve thought this through, and you are confident in your decision to sell, so just relax and explain your plans to the judge. If you have any documentation that details your intent, present it to support your argument.
Bring the Required Documents
Having the required documentation on hand will not only prevent any delays with the sale, but it will also show the judge that you are competent, professional and in control of your actions.
- Valid photo ID or driver’s license
- Settlement and release agreement
- Sale or transfer documents
- Annuity contract that funds your payments
Hiring a Structured Settlement Attorney
First and foremost, you must understand that the attorney the factoring company sends to your hearing does not represent you or your interests. This is the buyer’s lawyer, and as such, his or her loyalty is to the factoring company.
This is why the Structured Settlement Protection Act mandates that the factoring company’s disclosure statement provides “that the payee has the right to seek and receive independent professional advice regarding the proposed transfer and should consider doing so before agreeing to transfer any structured settlement payment rights.”
The “independent professional advice” should come from an attorney or licensed professional advisor who represents you exclusively.
Of course, there will be extra costs involved when you bring in your own legal counsel, but the cost of a lawyer with experience in structured settlement factoring transactions will, in most cases, be offset by the expertise and protection he or she brings to the table.
- How long have you been practicing law?
- What types of cases do you handle most often?
- Are most of your clients individuals or businesses?
- How do you charge for your services?
- What will be my total costs for representation?
- Can I pay my legal fees in installments?
- Can you provide me with a written statement that itemizes and explains all fees?
- Can I limit costs by gathering my own documentation?
The ABA also recommends interviewing several lawyers and contacting your state lawyer licensing agency to confirm that the attorneys you are considering are licensed in the state and have had no disciplinary action taken against them.
Frequently Asked Questions About Court Approvals
Most of the questions people have about court approval for their structured settlement payment transfers are specific to their individual situations, but you can find a bit of insight into what to expect during the process and after the court reviews your sale agreement.
8 Cited Research Articles
Annuity.org writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.
- American Bar Association. (2018, June 7). How Do I Know if a Lawyer is Right for Me? Retrieved from https://www.americanbar.org/groups/public_education/resources/public-information/how-do-i-know-if-a-lawyer-is-right-for-me-/
- Cornell Law School Legal Information Institute. (). § 1.451-2 Constructive receipt of income. Retrieved from https://www.law.cornell.edu/cfr/text/26/1.451-2
- Cornell Law School Legal Information Institute. (n.d.). 26 U.S. Code § 5891. Structured settlement factoring transactions. Retrieved from https://www.law.cornell.edu/uscode/text/26/5891
- Federal Register. (2003, February 19). Excise Tax Relating to Structured Settlement Factoring Transactions. Retrieved from https://www.federalregister.gov/documents/2003/02/19/03-3864/excise-tax-relating-to-structured-settlement-factoring-transactions
- Federal Trade Commission. (2002, June). Hiring a Lawyer. Retrieved from https://www.consumer.ftc.gov/articles/0180-hiring-lawyer
- FindLaw. (n.d.). California Code, Insurance Code – INS § 10136. Retrieved from https://codes.findlaw.com/ca/insurance-code/ins-sect-10136.html
- National Council of Insurance Legislators. (2016, November 20). Model State Structured Settlement Protection Act. Retrieved from http://ncoil.org/wp-content/uploads/2016/12/model-struc-settlement.pdf
- U.S. Government Publishing Office. (n.d). Title 26 – Internal Revenue Code. Retrieved from https://www.govinfo.gov/content/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapB-partIII-sec130.pdf