Want To Convert Your Structured Settlement To Cash? Here's What You Should Know


If you've received a personal injury settlement, won the lottery, or have another type of settlement that provides you with regular fixed income, you may be interested in trading these payouts for a lump sum of cash. There are a number of companies that will help you along in this process -- however, there are tax consequences and other financial considerations you'll need to ponder before pursuing this type of payout. Read on to learn more about the world of structured settlement payouts, and what you should know before cashing in. 

What is a structured settlement?

A structured settlement is any type of award that provides you with regular payments rather than a lump sum amount. These types of settlements are especially common in the personal injury context -- the rationale is that providing regular payments to the injured party will help assist with the ongoing costs of medical treatment or being out of work, while a one-time lump sum may be spent quickly (or even swindled by unscrupulous con artists), leaving the injured person still in need of funds.

Why sell a structured settlement?

There are many reasons one might wish to sell their structured settlement for cash. You may simply need the money to supplement your living expenses -- or you may be nervous that the company or entity providing this monthly payout may become insolvent, ending your payments. However, not all these reasons will be deemed sufficient to allow you to sell your structured settlement. Read on to learn more about the process and what you'll need to prove.

How does selling a structured settlement work?

Contrary to what you may see in commercials, getting a lump sum payout in exchange for your structured settlement is much more complex than simply calling a phone number. Regardless of the type of structured settlement you're selling, a judge will ultimately determine whether you are able to sell your settlement. In order to receive your cash, you'll have to prove the following to a judge:

  • You have a legitimate need for the money.
    • Some examples of this might include facing foreclosure or bankruptcy, dealing with an ill child or spouse, or experiencing extended unemployment or permanent disability.
    • Short-term unemployment, or a desire to purchase a new house or move are usually not deemed sufficient to grant a request to liquidate your structured settlement.
  • You aren't being coerced by anyone else to cash out this settlement.
  • Cashing out is in your best interest.
    • This can tie into the "legitimate need" factor. If you are facing foreclosure or bankruptcy, but the lump sum payout won't be enough to help you avoid foreclosure, your request may be denied. Courts would rather ensure that you have a long-term way to sustain yourself (even if you're going through some present financial rockiness) than help you throw good money after bad.

When you call one of the companies who advertise their assistance in obtaining structured settlement payouts, they will conduct an intake process to determine whether each of the above factors are true. If they decide that it is unlikely that a judge will grant your request, they will probably decline to assist you.

However, if they decide that you do have a genuine need for the funds, they will help you bring your case before a judge. This process can range anywhere from 30 days to several months or more. Generally, these companies will receive a percentage of any amount that is ultimately paid to you -- you won't owe them anything up-front.

What else should you know?

Because they are a type of retirement account, annuities carry hefty taxes and penalties if sold before you are at least 59.5 years old. If you sell an annuity before you've reached this age, you will be assessed a penalty of up to 10 percent, and the payout will likely be taxed at your highest marginal tax rate. 

Other types of structured settlements don't carry an age penalty, but may be taxed. Lottery winnings are nearly always subject to all federal and state taxes, while personal injury settlements are often tax-free. Specifically, the portion of a personal injury settlement that is meant to compensate the actual injury or sickness is not subject to tax, while any portion paid out for emotional suffering is taxable (unless the emotional suffering was directly caused by the physical injury).

Because this area of law is so nuanced, your safest bet is to consult an attorney or tax professional to determine whether any portion of your payout will be subject to tax. If your settlement (or a portion of your settlement) is taxable, be sure to set aside enough funds to cover these expenses so that you don't receive an unpleasant surprise when April 15 rolls around!

Click here for more info on structured settlement payouts.


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