Selling Your Settlement May Not Be the Best Way to Fast Cash

Last week I was in court waiting for my case to be called when I watched the most extraordinary exchange between a young woman and the judge. The petitioner was a normal looking girl of about 22. She was before the judge asking the court to approve the partial sale of her personal injury settlement. From what I could gather, the girl had been injured in an accident or as result of some egregious malpractice when she was very young. A suit was filed and a settlement of about $1 million reached. Her mother (who was not present) had wisely put the settlement into a structured settlement.

Upon reaching 18 she received a lump sum and then about every 2-3 years thereafter she would receive another sizable payment (something like $50,000 each). She was due to receive the next $50,000 payment in a few months. She was going to collect about another $300,000 in these periodic payments before receiving a final six-figure payout when she turned 35.

Here is the extraordinary part: She was in court asking the judge to approve the sale of around $300,000 of her future payments for the thumping great sum of $27,000. There was an attorney there from the company looking to complete purchase. And, the company was going to stick her with their legal bills, to the tune of a few thousand more dollars. She said she wanted to use the money for bills and tuition.

Not surprisingly, the judge (to her credit) was somewhat perplexed as to why the girl before her could not wait another few months for the $50,000 she was scheduled to receive. The judge asked the girl if she had tried to get a conventional loan from a bank or credit union. With a guaranteed $50,000 coming in a few months, any bank would be willing to give her the loan she needed. At this the girl began to cry, saying that she had a poor credit rating and that those banks were going to charge her a high interest rate. It seemed to escape her that she was, in effect, paying over 1000% interest on this little deal.

After some back and forth the judge agreed to approve the transaction on the condition that the girl consult with an independent financial planner and come back in two weeks with a letter proving that the plan made financial sense. Presumably the judge approved it since the girl had the legal right to make the deal. The judge was probably hoping someone could talk some sense into the girl before she came back.

The unfortunate part of all this is that she had not consulted an attorney or a good financial planner before signing on the dotted line. Had she done so she could have saved herself $270,000. This points out the incredibly poor financial education our young people are receiving.
If you have a settlement, annuity or lottery prize being paid in installment payments, be sure to consult an attorney and financial planner before you do something drastic like trade away a fortune in future payments for a pittance today.