by John Darer® CLU ChFC MSSC CeFT RSP CLTC
Some settlement buyers might argue that comparing selling your structured settlement to using a credit card is as valid as comparing apples to oranges—if oranges charged 20% interest. But really, how does racking up credit card debt differ from selling a structured settlement to fund your spending spree or pay the bills? Let's just say both have a way of making your wallet cry, but in very different tones of despair.
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 overnight in a hotel, you can use your credit or debit card or even consider pawning some jewelry. However, there is no need to cash out a structured settlement that you may rely on, either partially or fully, to cover such expenses. Waiting for your payments is not inherently a problem. Think of your structured settlement as a job and the annuity issuer as your employer—would you quit your job for a heavily discounted lump sum? After all, 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
It's time to part ways with that battle-worn, thrice re-upholstered hand-me-down couch, whose arms are shedding stuffing like a molting bird and doubling as chew toys for your kids or dog. You've been drooling over a plush black leather couch at a store like Raymour and Flanigan for $1,600. Many stores offer interest-free deals if you pay on time over, say, nine months. If you can spare $177.77 a month, go for it! Selling a structured settlement for couch cash is like using a sledgehammer to crack a peanut—legal fees alone would make it a horrible idea.
The President of the National Association of Settlement Purchasers has reported an average discount rate of 10.5%. Assuming this figure represents the mean, a significant portion of structured settlement factoring transactions are occurring at rates exceeding 10.5%. This rate is not particularly compelling when considering the cost of money. In addition to upfront costs, the purchasers' risk is relatively limited due to the credit quality of the life insurers backing the acquired obligations—at least, that is what some of them convey to investors.