by John Darer® CLU ChFC MSSC CeFT RSP CLTC
Some settlement purchasers want you to think that comparing selling your structured settlement to credit cards on the basis of rate, is a valid comparison. Is it? How does credit card debt differ from selling a structured settlement to buy things and pay for things.
Taking on Debt vs Liquidating an Asset
- When you use your credit card you are taking on debt. Once you pay off the debt what you bought is yours.
- When you sell your structured settlement payment rights, you are liquidating all or a portion of an asset at a significant discount, cents on the dollar.
Access to Credit or Structured Settlement Payment Rights
- Not everyone who has a credit card is receiving a structured settlement
- Not everyone who has a structured settlement is eligible for all credit cards. A structured settlement may help a financing company see that you have the means to pay back an installment loan [ note however, a structured settlement cannot be assigned as collateral for a loan]
Limits on Credit Cards v Liquidating a Structured Settlement
If you have a credit card, you generally have a credit limit which is based on a variety of factors, not the least of which is your credit history and your ability to pay back debt your have previously incurred. Controls are necessary, because without controls sh*t happens. The sub-prime mortgage crisis, was a catalyst to the financial crisis of 2008-2009. If you haven't seen The Big Short,. go see or rent the movie, or if you have time, read the book.
Maxing Out Credit Card v Maxing Out the Cash Out of Structured Settlement
- If you max out your credit card and you pay it down, you can charge it again up to the limit.
- If you "max out the cash out" of your structured settlement you're done. You've given up your income tax exempt income stream.
If you need to stay a night in a hotel you can charge it on your credit or debit card, or hock some jewelry. You don't have to liquidate the structured settlement that you may be living on, or partially dependent on, to fund it. There's nothing bad about having to wait for your payments. If you think of your structured settlement like a job and the annuity issuer as your employer, you wouldn't give up your job for a deep discounted lump sum would you? Have you ever seen a successful doctor without "patience"?
If you have a structured settlement one can sell ones entire structure, in some states with little opposition from a judge. Judge's in some states have acted like bartenders that just keep on pouring. In several states where court appearances will now be mandatory, it is hoped that observing the teetering tottering signs of 'cash now" inebriation in person will make for better judicial decisions.
While three states recently passed structured settlement protection act reforms that are awaiting a governor's signature there are 47 other states which need some symmetry.
Bankruptcy with a Credit Card
- If you have a credit card and you file for bankruptcy the debt can be discharged. With the passage of time you can build up your credit and perhaps get a new credit card.
- With the sale of structured settlement payments you're liquidating an asset. You will never get it back.
Interest Rates Credit Card v Sale of Structured Settlement
One is an interest rate on debt and the other is a discount rate on the future structured settlement payments being sold.
If you pay off your credit card or retail installment loan quickly the interest is of even less meaning in a comparison.
An example of where you would be better of charging, or financing, than selling your structured settlement
Say it's time to give up the thrice re-upholstered hand-me-down couch with the stuffing coming out of the arms that either your dog or kids seem to want to play with or eat. For a few weeks you've ogled a plush soft black leather couch at a store like Raymour and Flanigan which costs $1,600. Many furniture stores offer special deals where if you pay on time you get interest free for a period of time , say 9 months. If you can swing the extra $177.77 per month do that instead of giving up a guaranteed income tax exempt income stream. The legal and transaction fees alone would make the sale of structured settlement payments to finance the couch, a silly ludicrous proposition.
It has been reported by the President of the National Association of Settlement Purchasers that the average discount rate of 10.5%. Given that 10.5% is the average. Assuming we are speaking of a mean, that means that a significant volume of structured settlement factoring transactions are being consummated at levels in excess of 10.5%. The rate is not that impressive when considering the cost of money. Aside from up front costs, consider that the purchasers risk is limited given the credit quality of the life insurers who back the obligations being acquired. At least that's what some of them tell investors.