WASHINGTON (NNPA) – In a popular TV advertisement, ordinary citizens loudly declare to the world, “It’s my money, and I need it now!” It seems like a reasonable request. But this instant-gratification, through a process called structured settlement factoring, may not be in a person’s best interest.
As part of commemorating the 24th anniversary of the American Disabilities Act, the American Association of People with Disabilities (AAPD) turned its attention to consumer protections, particularly as relates to settlement factoring.
Incidents and accidents that result in disability often come with “make whole” cash settlements from the responsible party. Structuring the settlement allows the money to be safeguarded and split into uniform, tax-free, market-independent monthly payments for life, even if one is able to, and does, work.
“[T]he factoring of structured settlements…it is an important issue to many people with disabilities. On average, there are about five to six thousand people a year who factor their structured settlements, so it’s something that’s really critical for us to look at,” says Mark Perriello, president and CEO of the AAPD.
“So when we talk about structured settlements and the factoring of structured settlements, we really need to think of the broader context with which this is all occurring, and I think some of the numbers really paint a powerful picture.”
People with disabilities usually rely heavily on their disability settlements and/or social assistance for all or most of their income. Nearly 1 in 5 Americans with disabilities live below the poverty line. The poverty rate is even higher for Black Americans (20 percent of whom have disabilities, according to Census data collected in 2012)—36 percent of Black people with disabilities are poor, compared to the overall rate of 21 percent among all people with disabilities.
When financial emergencies arise, beneficiaries in a bind can’t simply draw funds from their settlements (outside of the established monthly payments). Factoring allows people to draw against their settlement by selling the rights to some or all of the monthly payments in exchange for an immediate lump sum of cash. In many cases, factoring also cuts future monthly payment amount to stretch the remaining funds across the lifetime. Of course, this reduction can set the stage for future factorings.
“There is a component of poverty that we need to consider; there’s a component of financial literacy that we need to consider as well,” Perriello explains. “There’s a reason why so many people with structured settlements decide to factor. It’s a perfectly legal practice in the United States, and we believe it needs to remain a legal practice. But there needs to be regulation.”
Decades of inadequate regulation have allowed predatory practices, such as charging steep fees or underpaying beneficiaries for their settlement rights, to seep into the factoring industry. To address this, the federal government installed structured settlement consumer protections into the tax code.
As of July 2002, all transactions to transfer settlement rights from a beneficiary to a third party have to be court-approved. Also under this tax code amendment, any person or entity purchasing settlement payments without court approval must pay a punitive tax. And almost every state has passed legislation (known as SSPA laws) to provide its own version of these protections. For a while, these provisions worked—until courts were inundated with requests to approve transactions.
“The theory is that a state court judge who now has to approve one of these structured settlement sales is not going to allow a plaintiff to get ripped off,” says Martin Jacobson, vice president and general counsel at Creative Capital, Inc., a law firm that specializes in structured settlements. “Unfortunately, it’s become a rubber stamp. [The tax code amendment] and SSPA have become ineffective, and we need something better.”
Enter Rep. Matt Cartwright (D-Penn.), who introduced the SAFER Structured Settlements Act at the start of this year. It would eliminate rip-offs by preventing companies from taking any more than 5 percentage points higher than the current ideal interest rate, and would limit administrative fees to 2 percent of the lump sum’s value. Finally, companies would be required to disclose information to help payees understand the process in general, and their transaction in particular.
“This bill acts as a backstop,” says Shelby Boxenbaum, legislative aid to Rep. Cartwright. “We live in a capitalist society, and people should be able to do what they want with their money, to an extent. But there’s a difference between having freedom and being completely taken advantage of.”
The sustained advocacy and legislative efforts toward consumer protections for all have been generally praised, but they have also been tempered by socioeconomic realities. Ideally, Jacobson advises his clients to have a bulk of their settlement structured; negotiate a Life Care Plan that accounts for emergencies and life events; and receive the remaining portion in cash to invest, with the help of a qualified adviser.
More commonly, beneficiaries are unaware that such a safety net could have been created at the time of their settlement. Now, living on economic edge, settlement factoring presents the only personal finance safety net they can access.
“We all have expenses that come up that are unexpected. But I think it goes back to the financial literacy question and I think what we need to do is really educate consumers on what factored structure settlements are,” Perriello says. “Because if [a settlement] is done right, and if your spending is right, you should be able to plan for unexpected needs just as you can plan for expected needs as well.”