Tips for Selling a Structured Settlement

This post will offer some tips and advice for selling a structured settlement, as it is not an easy thing to do.

Background
Structured settlements by their nature are set up with the intention to provide long-term regular annuity income for the recipient. Most recipients of a settlement are considered beneficiaries for many years.

Tips-for-sellingBecause of the circumstances that typically led up to a settlement in the first place, much of the legal arrangements and favorable tax treatment assumes that a settlement will not be sold at any time. The regular annuity payments are provided by a small number of large pre-approved insurance companies who have been approved for the purposes of providing stable returns and safe investments no matter what the economy does. This security has been proven in the past, as despite downturns in the national and international economies, that despite the fiscal banking crisis, no structured settlement payments to an individual have ever been missed due to financial mismanagement on behalf of the insurance companies.

The tax treatment of structured settlements is similarly set up to encourage favorable long-term tax treatment of the periodic payments. With the Periodic Payment Settlement Tax Act (1982), periodic payments from a structured settlement are considered tax-free from federal taxation.

With all this background, most of the established organizations (courts, IRS, state assemblies and large insurers) work together to create binding settlements to compensate victims for many years.

Changing Circumstances
These constraints and limitations are fine for many people, however personal circumstances do not remain constant. For some people, their personal circumstances may have changed significantly since the settlement was set up. Although regular payments are a great benefit in many cases, sometimes a change is needed.

There are many factors that come into place for people with different needs compared to their original situation. Just consider what can change to just about anybody over a couple of decades – as a few examples, there may have been births and deaths, illness or health, personal finance profits or debts, success in business or business failure.

Valid Reasons
Because of the way these settlements are set up, and the way the establishment does not want to see change, there are many restrictions on the sale of structured settlements. In fact forty seven states have passed guidelines restricting and controlling their sale. Because of these restrictions, there are a limited number of valid reasons that a court will allow a structured settlement sale to go ahead. Here is some useful information on what are considered valid reasons: personal debt reduction (where consumer debt has got out of hand), downpayment for a home, payment to stop home foreclosure, sound business investment, college or university fees for an education for the recipient or close family member.

Specific Tips
To have the best chance of approval of a sale, its reason must fit the criteria of one of the reasons above. Don’t forget that any sale must be approved by a judge or court, and they will only agree if they consider the sale to be in the individual’s best interest. Collect all relevant paperwork together in advance, the more documentation that is provided, the better the case for a sale.

It is also a good tip to consider selling only a part of a settlement, so there will still be a significant monthly payment as well as a lump sum, as courts will consider that favorable to the recipient. And the last tip for selling a structured settlement is to shop around before choosing a company that will provide the funds. There are many different companies offering to buy settlements, and the amount that they will charge will vary widely, so make sure the best deal is available before starting the selling process.

Introduction to Bond Investments

When looking to raise capital for investments, one of the most popular ways for a company to do this is by selling a bond. Bonds are used extensively by the federal government to raise money, in which case they are known as treasury bonds, but that is a topic for another day.

Company Funding Options
Bonds-vs-StockMost companies have two main options to raising money for investments, either by selling stock or bonds. Depending where a company is in its life cycle, both can be good choices. Selling stock raises capital which does not need to be paid back, but it comes at a price of diluted ownership for the owners or current stockholders, and sometimes bonds are preferable. Instead of equity, issuing debt or bonds can be a good choice when the shareholders do not want to issue more stock, and the company is generating enough cash flow to service the bond repayments.

Commercial Bonds Defined
A commercial bond is a loan to a company, made by an individual, group of investors or another company. The loan brings in money to the issuing company which can then invest in additional assets, which may be new plant, materials or buildings to grow the company. Typically a bond is secured by a contract with the company which guarantees repayments on a set schedule over a period of time, which typically varies from 1 to 10 years.

Issuing bonds allows a company to loan money from a wide selection of lenders and investors, who individually may have been reluctant to take on the liability of the entire loan amount of the issued bonds total.

From the lender’s perspective, they do not get a return from the potential growth of the company (which may or may not happen, and may or may not be profitable), but they do get a fixed and guaranteed return on their loan, over a period of years.

Investors Asset Mix
Many investors like bonds because the return on a quality corporate bond is pre-determined, and is relatively low risk. This is in contrast with a pure equity investment which can be high risk, with no guarantee of return. To balance out an investment portfolio, many asset managers use a mixture of stocks and bonds in a portfolio to balance out potential risk. The actual percentage of each component varies, and with individuals depends on their risk tolerance. In most cases risk aversion grows with age, and many younger investors have a high percentage of stock for the potential capital appreciation and few bonds, whereas older investors nearing retirement often have a high percentage of bonds to guarantee income.

Bond Interest
The interest on a bond is fixed, and is more dependable than a stock investment. The face value of a bond (sometimes called par value) is typically set at $1000, and the annual interest rate (sometimes called coupon) will be set at time of issue, with the maturity date (when the loan is due to be repaid) in a year or more. In practice the interest rate or coupon is typically paid semi-annually to the investors. If the coupon rate is higher than the current market interest rates available to investors, then as long as the bond is relatively low risk, then it is an attractive investment, and potential investors will be willing to pay more than face value. Alternatively if better investments re available elsewhere, then investors will not be willing to pay the full face value of the bond and it will sell at a discount. Most bonds pay an annual interest rate, but in some cases. no interest is due to the end, and these are known as zero coupon bonds.
 

 

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