A March 23 article in the Wall Street Journal told the unfortunate story of two individuals who received structured settlements designed to last a lifetime only to see their money squandered with the help of an overzealous (and one possibly criminal) factoring company (“Firms Help Settlement Holders Cash Out Payments Meant to Last a Lifetime”).
While I don’t usually ever recommend selling structured settlement annuity payments, there may be very rare cases where there is no other choice. The factoring horror stories mention in the WSJ article took place in Virginia and Florida. While California has some of the strictest guidelines in the country when it comes to selling structured annuity payments, it’s always a good idea to understand the do’s and don’ts of the process and to know the factoring company you’re dealing with.
SB510 Set the Standard
SB510, passed in 2010, spelled out the protections for structured settlement recipients in California. Specifically, it requires that the lawyer who handled the settlement be notified first before any buyout can take place. The attorney can counsel the injured party so he or she is fully informed of the consequences of selling future annuity payments.
Courts must follow explicit guidelines before allowing the sale to go through. Some of these guidelines include a review of the injured party’s current and future financial needs, whether the party has received independent legal and financial advice concerning the buyout and if the “discount rate” proposed by the factoring company is in keeping with current market rates. The courts would also require that injured parties be clearly shown the value of the structured settlement versus the value of the lump sum buyout.
Instead of routinely approving annuity payment sales as was the case before SB510, judges are much more diligent in making sure the buyouts are in the best interest of the injured party.
Factoring Company Red Flags
Not all factoring companies are created equal. Here are things your clients should look for in a factoring company when selling annuity payments is the best option. These guidelines come from David Meyerowitz, President/CEO of Strategic Capital, an annuity buying company that is endorsed by the Consumer Attorneys of California.
1. As you would with any other expert, refer your clients to a factoring company that you know and trust.
2. Be wary of factoring companies who advertise on TV, make unsolicited approaches to your clients, offer gifts, make offers that seem too good to be true, claim to offer “loans,” or are not open and transparent about the transaction.
3. When selling payments, your clients’ main focus should be their needs, not just the price. Selling too much or the wrong payments is a bad decision regardless of how much money is offered.
4. Advise your clients to search the Internet for complaints about a factoring company before signing anything.
Structured settlements are a fantastic financial tool and only a minority of clients ever needs to sell. However, when they do need money, your clients will sell no matter what you say. Protect their interests by referring them to a factoring company that you trust, who will work with them to address their current needs while keeping as much of the structure in place as possible. If you don’t, they will be taken advantage of by unscrupulous companies who will promise everything under the sun in order to purchase their entire structures for pennies on the dollar. It can be in your hands to ensure that this does not happen.
Give me a call with any questions or feel free to contact David at 416-849-3484, david.meyerowitz@StrategicCapital.com.
– Pat Farber