Here at Ringler, we take great pride in the fact that we specialize in planning structured settlements, a legal tool designed to protect the most vulnerable members of our society. But where there is vulnerability, there are those looking to take advantage of it. The predatory practice of structured settlement factoring preys on the financial needs of disabled people. Ringler condemns it strongly and calls for more robust consumer protection against factoring. Let’s examine what factoring is, why it’s terrible, and why it matters.
Structured settlements allow an injured party to receive a personal injury settlement in the form of consistently scheduled payments over several years. This structure is essential because it guarantees tax-free income over time to compensate for costs such as lost wages and potentially rising medical bills.
However, these benefits can be negated by factoring companies, who buy structured settlement annuities from injured claimants at a value much lower than the present long-term value of the structured settlement. In other words, a factoring company gives the injured claimant a lump sum of money much smaller than they stand to receive over time through the structured settlement; in return, the claimant loses their right to the income over time from the structured settlement, and the factoring company itself becomes the recipient for the structured settlement payments. Effectively, the injured party’s position in the structured settlement is bought out.
It is essential to consider why structured settlement recipients would choose to participate in a factoring transaction and sell a source of guaranteed income. Often, the people who resort to this avenue are in need of immediate cash, which is not surprising given that disabled people are, unfortunately, a disproportionately financially vulnerable population.
12.9% of people with disabilities versus 6.1% of people without disabilities are unemployed; around one in three disabled people live below the poverty line; and only 16% of people with disabilities say they have at least three months’ expenses set aside as emergency funds, compared to 41% of people without disabilities. Moreover, given that disabled people and people who have experienced catastrophic injury are also more likely to have to deal with large and unexpected medical bills, structured settlements are especially likely to accrue to people who will need immediate cash that they do not have. Combine this with the barrage of targeted late-night TV ads to which this demographic is subjected, and the temptation to factor their structured settlements can be hard to resist.
Like payday loans and title loans, structured settlement factoring preys on a lack of financial literacy among some members of a vulnerable population to make a profit for the companies responsible. While there are certain situations where an injured claimant may need more immediate access to a large sum of money, there are established and time-honored methods to accomplish this and give up a much smaller portion of the income they stand to earn through the structured settlement over time.
For example, taking a personal loan from a bank or taking out a second mortgage at a reasonable interest rate and using the periodic structured settlement payments to pay back the loan can allow the claimant to keep much more of the money owed to them. But factoring companies swoop in and take advantage of people’s lack of knowledge about these options by targeting them with advertisements that make factoring appear to be a magic bullet solution. At the same time, they are in a vulnerable position, leading them to sign away their rights to one of the most secure forms of investment for pennies on the dollar.
To combat the efforts of factoring companies, multiple measures are required. First, consumer financial literacy education is essential to make consumers aware that factoring is not in their best interest and that there are more constructive alternatives by which they can obtain the money they need.
Second, courts are overloaded, and judges are overworked, leading to the rubber stamping of factoring transactions without pushback or further investigation into the details. But again, this can be combated by the training of judges and the provision of additional legal resources.
Lastly, stronger legislation to protect consumers would help prevent factoring companies from taking advantage of disabled people. Measures covered by this legislation can include a direct limit on the percentage of the structured settlement value that factoring companies are allowed to take as profit and administrative fees; a requirement for factoring companies to disclose to consumers the financial terms and effects of a factoring transaction as well as the fair market interest rate of a personal loan; and the provision of organizations such as the Consumer Financial Protection Bureau and Attorneys General’s offices to investigate and regulate predatory factoring practices.
Ultimately, we must protect the financial well-being of disabled people and other injured claimants from the manipulative practices of factoring companies, and Ringler is here to help. If you need personalized assistance with your structured settlement and want to learn more about your options, you can find a Ringler Consultant here!
To listen to our latest podcast on this topic, listen to our full podcast episode here: Ringler Radio Factoring Topic Podcast Episode
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