Are structured settlement annuitants better off selling their structured settlement payment rights to meet their financial needs when in distress? J.G. Wentworth attempts to frame the argument in a helpful series of blog posts which address the question of whether structured settlement annuitants should sell structured settlement payments to meet a pressing financial need, or use other sources of financing?
The "Sell Structured Settlement v alternative sources of financing" series compares structured settlement funding to:
- Home Equity Loans
- Borrowing From 401(K)
- Credit Cards
- Taking Out a Bank Loan
- Borrowing from Friends and Family
- Rent To Own Retailers
A "balanced approach" is a good idea when seeking cash now from a cash cow
While attempting to be balanced, unsurprisingly J.G. Wentworth's analysis is slanted in favor of structured settlement annuitants resorting to cash now pushers.
The common thread in all per J.G. Wentworth is:
- Currently, the discount rates on the sale of structured settlement payments are often lower than most credit card interest or loan rates.
- When you sell structured settlement payments, you do not create additional debt that you must later pay off.
- There are generally no tax implications when you sell structured settlement payments.
Here are the negatives that J.G. Wentworth claims for each alternative financing method.
- If you don’t own your home, you cannot get a home equity loan.
- Having a home equity loan outstanding may negatively affect your credit score, especially if you miss or are late on payments.
- A home equity loan creates a debt that must be paid back in full with regular, fixed payments.
- Some banks may limit the ways in which you can use the proceeds of your home equity loan. For instance, you may not be able to use it to start a business.
- The bank that gives a home equity loan to you will have a lien on your home.
- If you are seeking financing from your structured settlements isn't there a pretty good chance that your credit score is already impaired?
- Regular, fixed monthly payments huh? Sounds like somethning we know.
- What are you going to do for income after you have transferred your structured settlement payments?
- You need to have a 401(k) plan in the first place. Not all employers offer these plans. Unfortunately, if your employer doesn’t, you’re out of luck.
- Your particular 401(k) plan may not allow you to borrow from it. You’ll need to check this out.
- You lose steam in your 401(k) plan. The money that you borrow means there is less to earn interest, dividends and capital gains.
- If you don’t repay the loan and you are younger than 59 ½, it will be considered an early distribution and you will owe state and federal income taxes as well as a 10% penalty for making an early withdrawal.
- The loan isn’t tax deductible. It’s considered a consumer loan, so there is no tax advantage
- With consumer loans it is the interest that is not tax deductible, not the loan itself. On Oct. 22, 1986, President Ronald Reagan signed into law the Tax Reform Act of 1986, a sweeping overhaul of the tax code which gradually phased out all deductions for interest paid on auto loans, charge-account purchases, vacations and anything else that fell under what the law termed 'consumer loans.'
- The effective discount rate that J.G. Wentworth (or any other cash now pusher) charges you is not tax deductible is it? Can you take a tax deduction for the factoring discount?
- The application process for a bank loan can be complicated and sometimes it takes a long time for a bank to make a decision on your loan application.
- If you get a bank loan, you will need to collateralize (i.e. back-up) the loan with your own personal assets such as your house, car, jewelry and investments. The bank does this so that if you are unable pay them back, they can take these assets and sell them to recover their money. So, not only are your personal assets at risk with a bank loan, but also, you cannot borrow money in excess of what your assets total.
- A bank loan creates a debt that must be paid back in full with regular, fixed payments.
- If you need a loan to start a business or help your existing business, the bank will consider your request as a business loan. Typically the minimum amounts for business loans are much higher than the amounts people may want to borrow.
Before you start any business make sure you have a plan and a back up plan. You will need it to convince the judge that your transferring structured settlement payment rights is in your best interest and the interest of your dependents.
Depending on plan design, structured settlement payments provide regular fixed payments. Ironic that this is the same characteristic of payments required to carry a bank loan.
- Credit card interest rates in excess of 20% are not uncommon. Late payment fees can be even more significant. For instance if you are charged $35 for a $1,000 payment that arrives one day late, converting that figure to an interest rate for what is in effect a one day loan equates to an annual interest rate of more than 1,200%. If you are one day late paying off a $50 dollar balance and are charged $35, the effective interest rate is more than 25,000% .
- Credit card agreements are complex and can contain several hidden fees. For instance, the use of average daily balances means you could be charged interest even during a month when you never used the card. Moreover, even if you read and understand the agreement, they are changed frequently. Committing to read your credit card agreements as they change requires a significant amount of time.
- In order to get a credit card, you must give up potentially sensitive personal information to qualify and get the card. In addition, the credit card company will request a credit report. The number of credit report requests in any given year has a negative impact on your credit score.
- If you make only the minimum monthly payment, it may take years to pay off the balance Your total interest paid could exceed the cost of what you purchased.
- While as a structured settlement annuitant can find discount rates on structured settlement factoring transactions that are below credit card rates, you must be sure you are comparing an "effective discount rate" that encompasses ALL fees and charges.
- A structured settlement annuitant deciding to go down this road (selling) (1) should seek independent professional advice and (2) should shop around (particularly if responding to big advertisers who must recoup their marketing costs.
As J.G Wentworth states, (for structured settlement annuitants), the right to receive payments now and in the future is a financial asset just like stocks, bonds, mutual funds, real estate and other financial instruments. As a result, if you need cash today, you should consider not just the sale of some or all of your structured settlement payments, but other assets as well. Some factors to consider when evaluating your assets include ease of sale, potential gain or loss associated with the sale and the impact on other owners of the asset if it is jointly held.