Structured settlements provide reliable income to injured parties over time. But when financial hardship arises, recipients may consider selling their future payments for an immediate infusion of cash.
This decision requires carefully navigating a web of state and federal regulations designed to protect recipients from exploitation. Understanding this complex legal landscape is crucial to making the most informed choice.
In this guide, we’ll explore the history and intent behind structured settlement protection laws at both the state and federal levels.
By the end of the article, you’ll have the insights to make sense of this convoluted regulatory system before considering a transfer.
The Evolution of Safeguards for Sellers
But the billions flowing through these settlements also attracted predatory companies aiming to profit by purchasing future payments at steep discounts. They actively offer quick cash to struggling recipients in exchange for signing over funds at a fraction of their actual value.
For example, a recipient entitled to $3000 per month for 20 years may be presented with an immediate $50,000 lump sum payment offer. That provides less than 30% of the total amount owed.
These harmful practices actively spurred policymakers into action. In 1998, Illinois passed the first structured settlement protection act, requiring court approval for all transfers based on the seller’s best interests.
By 2002, 46 other states followed suit and enacted similar laws. That same year, President Bush actively signed federal legislation supporting state protections by imposing a 40% excise tax on any transfer not court-approved.
This combined state and federal approach now actively safeguards structured settlement recipients from exploitation when navigating the complex process of selling future payments.
How Federal Law Reinforces State Protections
The federal excise tax strengthened state-structured settlement protection acts in two key ways:
- It Automatically Ratified Existing State Laws
Before 2002, violating state laws carried minimal consequences. But the 40% federal tax now triggered major implications for any transaction skirting state requirements.
- It Prompted Remaining States to Pass Protections
In 2002, only 46 states regulated structured transfers. The federal policy pushed the stragglers to enact protections. This created a national framework whereby injury victims have safeguards no matter their state of residence.
Key Provisions in the Model State Law
While specifics vary, all state laws contain core concepts drawn from a model statute by the National Council of Insurance Legislators. Understanding these common provisions provides insight into how most states regulate transfers:
- Court Approval – A judge must approve any transfer based on the payee’s best interests to prevent exploitation.
- Disclosures – Before court proceedings, the buyer must provide the terms of the deal, like fees charged. This allows the judge to better evaluate fairness.
- Right of Rescission – Payees can cancel without penalty during a “cooling off” period, giving time to reconsider.
- Notifications – All affected parties, like family, must be notified of the intended transfer so they can voice concerns.
The model law enshrines key values like court oversight and payee rights that aim to empower sellers during the transfer process.
Key Differences Between State Laws to Understand
While Structured Settlement Protection Acts share commonalities, provisions also vary meaningfully from state to state:
- Professional Advice Rules – Most states mandate or recommend seeking independent advice, but requirements differ. Some just advise consulting an advisor, while others make it mandatory.
- Workers’ Compensation Exceptions – Many states prohibit transferring workers’ comp structured settlements, but some, like North Dakota, permit them.
- Interest Rate Caps – About half of states limit how much buyers can discount future payments, restricting their potential profit.
- Court Jurisdiction – Some states mandate filing in the payee’s home county, while others allow more venue flexibility.
- Cancellation Windows – Rescission period lengths range from 3 days in some states up to 30 days in others.
Depending on the residence, protections may differ greatly. Consulting your specific state law is crucial. Never assume the rules are uniform nationwide.
Recent Major Changes to Stay Informed About
State legislatures continue updating structured settlement protection laws. Notable recent changes include:
- Florida (2016) – Added strict venue requirements, mandatory payee court appearances, and disclosing prior transfer attempts. This increased the regulation of transfers.
- Maryland (2016) – Now requires buyers to inform the court if a payee’s original injury settlement involved cognitive impairments, given concerns those individuals are more susceptible to unfair deals.
- Minnesota (2022) – Judges must now appoint an independent advisor to guide payees who appear to have mental or cognitive disabilities. This aims to protect potentially vulnerable recipients.
Review Your State’s Law Before Proceeding
While federal law sets baseline requirements, state statutes actively determine the key details impacting your choices and outcomes when selling future payments. Carefully reviewing your state’s structured settlement protection act before engaging any buyer helps ensure you understand your rights in the process.
Selling future payments can provide much-needed funds. However, grasping the nuances of state and federal regulations assists in avoiding actively relinquishing more income than necessary. The convoluted legal landscape makes working with a reputable advisor essential.
Bara is a seasoned expert in the structured settlement and annuity field, with a successful career in structured settlement factoring. Her experience spans prominent companies such as J.G. Wentworth, Peachtree Settlement Funding, and Liberty Settlement Funding, where she managed substantial marketing campaigns. Constantly updating her knowledge, Bara is committed to providing exceptional experiences and maintaining her position as a trusted professional in the industry.