The Structured Settlement Protection Act of 2002
When a person settles a lawsuit against an insurance company, the settlement may include a structured settlement, which consists of periodic payments rather than a lump sum payout.
These types of agreements were designed to protect the interests of those who receive structured settlements, often known as payees. State lawmakers have enacted laws to regulate such transfers, which are called Structured Settlement Protection Acts or SSPAs.
History
Structured settlements are a popular way to resolve personal injury claims. They provide a stream of tax-free payments to tort victims and their families. They are also used to settle workers’ compensation claims and wrongful death claims.
While structured settlements are a valuable source of financial security for tort victims, they can be exploited by unscrupulous companies who purchase them from injury victims in exchange for a lump sum amount. These companies are called “factoring” companies, and their practices have caused concern among tort victims and public assistance agencies.
In 1982, Congress passed the Periodic Payment Settlement Act of 1982 to encourage the use of structured settlements in tort cases. The Act established a special exemption from federal taxation for structured settlements received by tort victims as well as the companies that fund them.
However, the law did not predict that a thriving secondary market in the buying and selling of injured individuals’ settlement payment streams would develop. This market has left tens of thousands of tort victims and their dependents without the financial security that structured settlements purport to offer.
These abuses have led to state laws that require court approval before a payment stream can be sold. These laws, known as “SSPAs,” have gained the backing of the federal government and are in place in all 50 states.
To protect injured parties, these statutes are designed to allow the sale of structured settlement payment streams only when it is in the best interests of the claimants. The sale process should be transparent and fairly handled.
Since 2002, states have enacted laws to protect the rights of structured settlement holders by requiring court approval before payments can be transferred. These laws are supported by the federal government and are effective in protecting the victims who have been harmed.
While the protections of these state laws are effective, they do not prevent unscrupulous individuals from buying or selling structured settlement payment streams at deep discounts. Under the Protection Act, courts must review any transfer application in order to determine whether it is in the interest of the defendant. The court must also consider a number of disclosures before approving the transfer, and it must make a finding as to the defendant’s ability to sell the payments.
Taxes
Those who receive structured settlements are generally tax exempt and can sell their future payments without any taxable gains. They also cannot be taxed on the money they earn from the sale, as long as the sale is approved by a court.
However, the law is susceptible to abuse by unscrupulous parties. For example, a liability insurance company may try to take advantage of this loophole by selling the rights to future payments in order to generate a large amount of cash from the sale.
In 2002, Congress enacted the structured settlement protection act of 2002 to protect those who receive structured settlements from abusive practices by third parties. The legislation mandated that any transfer of structured settlement payment rights be approved by a court.
There are also state laws that govern transfers of structured settlement payment rights, which are known as structured settlement protection acts (SSPAs). The protections provided by these statutes are intended to ensure that victims of serious injuries have full and clear understanding of the terms of their transaction before it occurs.
Many states have SSPAs in place, including Illinois, Florida, Maryland and Virginia. In addition, the District of Columbia has a law in effect as well.
The statutes in effect vary among states, but the laws generally require that transfers of structured settlement payment rights be approved by judicial authorities before they are completed. Additionally, the law often requires that the seller receive independent professional advice from a qualified financial advisor.
This is important because the law imposes a tax on any person who acquires structured settlement payment rights in a factoring transaction that does not qualify for an exemption from the tax. This tax is imposed on 40 percent of the discount rate that is paid for the structured settlement payment rights.
The tax imposed under section 5891 is reported on Form 8876, Excise Tax on Structured Settlement Factoring Transactions. There are certain exceptions to the tax, as described below. Those include transfers that are approved in advance by a court in a qualified order, and transfers of structured settlement payment rights that are a part of a workers’ compensation case.
Liquidity
A key issue associated with the structured settlement protection act of 2002 is liquidity. This is a term used in the financial industry to describe how easily an individual or a company can sell an asset.
Liquidity is also the ability of a company to pay its debts, such as mortgages and other loans, on time. Analysts measure a company’s liquidity by examining its balance sheet and looking at the current assets it has on hand, including cash and marketable assets.
A company’s liquidity is important for investors, who want to know how quickly a company can pay off its debt. A low level of liquidity means that it may have a difficult time paying its debts, which could result in the company falling behind on its payments.
Similarly, liquidity is crucial for companies that need to raise money through an investment or sale of inventory. If a company’s inventory isn’t liquid, it can take a long time to sell, incur additional costs and be worth less than the original value of the goods it contains.
One way to improve liquidity is to ensure that a company’s investments have a high rate of market liquidity, meaning that there are multiple buyers and sellers who are willing to trade the stock in question for a lump sum. This helps keep the price of the stock from falling too rapidly, which can make it hard for companies to meet their obligations.
Another way to increase liquidity is to transfer the right to receive future periodic payments in exchange for a lump sum. This process, which has been around for at least 5,000 years, is often called factoring.
The CFPB has issued a warning to consumers about factoring transactions, which have been used by unscrupulous individuals to purchase billions of dollars’ worth of structured settlement payments from tort victims and other beneficiaries at inflated prices. These practices have weakened the protections provided by congressional policy, and have left many beneficiaries with little to no financial security. The CFPB says that the practice is unfair and a violation of federal law.
Transfers
In the United States, a structured settlement is an agreement that results from the resolution of a tort case and provides periodic payments instead of a lump sum. The periodic payments are considered a secure source of long-term income for many structured settlement recipients, and they can also provide tax benefits.
In recent years, a number of state legislatures have enacted laws that permit the transfer of structured settlement payment rights through “factoring” transactions. These transfers are a form of encumbrance or alienation for consideration and must be approved by the courts. The transferee, or the seller, must be able to demonstrate that the proposed transaction is fair and in the best interest of the payee and his or her dependents.
The transferee must file a petition with the court and submit evidence supporting the request for approval of the sale or assignment. If the petition is denied, the transferee can reapply for approval in a different court. If the transfer is approved, the court must find that the proposed transfer serves the payee’s best interests and is necessary to prevent undue financial hardship.
Several factors influence the outcome of a court’s decision. For example, the court may consider whether the payee has received independent professional advice about a proposed transfer.
Additionally, the court must consider whether there is any evidence that the payee’s personal situation has changed in a way that would make it difficult for the payee to service the payment obligation. If the court finds that the payee has experienced a substantial change in his or her personal situation, it may approve the sale of all or a portion of the structured settlement payment rights.
It is not uncommon for a payee to attempt to sell all or some of the structured settlement payment rights in exchange for an immediate lump sum. Such transfers can be risky because they leave the payee vulnerable to businesses that demand unfair concessions, which could result in a substantially discounted lump sum or deprive the payee of long-term financial security.
The National Council of Insurance Legislators (NCOIL) has developed a model statute for the protection of structured settlement payment rights. The model act requires that a transfer be in the payee’s best interest and is not incompatible with the welfare of his or her dependents. It also gives interested parties the opportunity to oppose a transfer and requires that payees be advised to obtain independent professional advice before transferring their payment rights.
- Understanding Business Line of Credit Refinance - April 28, 2023
- The Pitfall of Mortgage Refinance Calculator - April 28, 2023
- finance manager.1476737005 - April 28, 2023