Litigation

The True Cost of Poor Settlement Planning

By John Darer

Structured settlements offer many valuable benefits to tort victims. But too much of any "good thing" is not necessarily a GOOD THING. The purpose of this post is to make structured settlement consultants, attorneys , judges and tort victims aware of why there is a need for a comprehensive plan of distribution of settlement proceeds that follows a fact finding process.

In my opinion there is no excuse for a structured settlement recipient to have to sell structured settlement payment rights within months of the structured settlement being created.

I would like to make structured settlement brokers, settlement consultants, settlement planners and those that manage them aware of the cost of what could be considered  "too much of a good thing"

Taking the example of a person receiving structured settlement payments from an annuity set up 2 months ago.  She briefly met with someone introduced to her by her attorney who said he was a "settlement planning consultant". She is to receive monthly payments of $10,000.00 for 240 months (20 years) certain. Before she has even received the annuity contract she realizes that the amount of up-front cash is not sufficient to take care of her immediate needs. She needs $105,000 to cover her shortfall.  All parties have however, executed a release and funds have changed hands. She contacts her attorney and is told that it is too late. She sees an ad on the Internet on calls the toll-free number.

The factoring company tells her that they can give her "cash now" in the amount of $105,000 within 60-90 days, but she will have to give up the rights to $1,600 per month (16%) of her $10,000.00 per month structured settlement payments for 20 years.

She is told that this equates to an approximate discount rate of 17.34%. Initially it seemed fair taking into consideration the prevaling credit card rates. 

But is that really all there is to it?

The cost of $1,600 per month of structured settlement payments from the A.M. Best rated "A+" company that issues the structured annuity (two months ago) was $252,162.00 Now she's getting an offer of $105,000.00 two months later, That's a 41.64% reduction in principal in 2 months!

She's confused, both her attorney AND the settlement consultant who was referred by her attorney said this was "a conservative investment". Last September she lost 30% on her 401(k) that was invested in  stock mutual funds. "How could this be worse?" she thought...

HOW COULD THIS BE WORSE? THAT IS THE QUESTION!

Now I don't want my friend, The Factoring Channel's Matt Bracy, to get upon his soap box and try to justify the cost of money as he has often done in the past with erudite precision. Don't fall off your chair but in this case I'm not attacking the factoring companies. That is not the point here. The factoring company is simply valuing the future periodic payments using a formula so it cash make a profit. In this case I'm looking at what did she invest and what is she getting back ("in 60-90 days" if a court approves)

The point is that it appears that the "brief encounter" has proved to be as risky as any other type of "brief encounter". In a financial case of "ain't that the truth", you need to get to know someone before you "get in bed" with them. Had there been a greater knowledge of the woman's needs perhaps there wold have been more allocated to cash from this good size settlement (hell, $400,000 already was!)

Settlement planners, whether registered settlement planners or those that use the term "settlement planner" (in holding themselves out as such) have the responsibility to do a sufficient level of fact finding before making recommendations that could end up as financial devastating as the above example. Attorneys representing tort victims share this responsibility, in my opinion, particularly if they are simply bringing in an adviser otherwise highly qualified, only ask for an annuity quote and fail to address the client's liquidity needs. A structured settlement broker or settlement consultant who takes the random plaintiff case must also recognize a level of responsibility.

Structured settlement factoring transactions carry a high cost of money (average discount rates are now purportedly in the mid to high teens). It is generally  NOT a good idea to sell your structured settlement payment rights until you have explored and exhausted all other options. Tort victims who must go down this route should try to accomplish your goal with as little disruption to your long term structured settlement as possible.

There is a huge range in discount rates with a concomitant effect on how much you can raise for sold payments. Remember if you are really stuck and must sell, you want to sell as little of your structured settlement payment rights as possible to solve your unexpected financial problem or accomplish your goal.

Use the free structured settlement factoring discount rate calculator to assist you in evaluating the true cost of the potential decisions you are contemplating. Determine the cost of the payments you're thinking about selling and compare that to what you are being offered.

Full post as published by Structured Settlements 4Real on June 09, 2009 (boomark / email).