Protecting Californians From Predatory Settlement Purchases

Many Californians, disabled and injured in accidents and product failures, as part of a court settlement, elect to enter into structured settlement agreements which provide a guaranteed stream of payments over time.

These settlements offer stability and certainty to people whose lives have been shattered by tragedy, thereby bringing security and stability to families by providing a regular income stream to meet present and future financial obligations. This is especially important for those with life-long disabilities as studies have shown that 25-30 percent of all lump sum settlement payments are gone within two months and 90 percent are completely gone within five years; structured settlements are intended to prevent this rapid dissipation.

As is evident by the large number of television commercials targeting recipients of these awards, encouraging them to trade in their future payments for cash, now, corporations, some more scrupulous than others, see a ready profit in purchasing these financial instruments for mere pennies on the dollar. As a result, many sellers don’t understand the full impact of their decisions.

To protect these recipients from unscrupulous purchasers, California laws require court approval for the transfer of such payments. Unfortunately, courts currently have very little guidance regarding the criteria to consider when deciding whether such a sale is in the "best interests" of the consumer.

To further protect these recipients, and to protect Californians from having to pay future expenses which would be covered by these agreements, the California Legislature should adopt SB 510, which will provide judges with clear guidance when deciding whether the recipient of a structured settlement agreement can sell the rights to future payments.

The Intention of Structured Settlement Agreements and Problems with Buyouts

To understand the need for this legislation, one must first understand the intention and purposes of structured settlements. Structured settlements are used most often where the injured party may be permanently disabled from employment, require future medical treatment, or require long term care. Usually these cases involve significant life changing injuries or the death of a primary financial provider.

Another area where they are frequently used is in the case of a minor child who has been injured. The law requires that funds received on behalf of a minor are secured and invested until that child reaches the age of majority, 18. Structured settlements are often used to plan for the future care needs of the child once they reach adulthood and/or to help pay for their college education.

By spacing payments over time, such agreements ensure that money for medical care is available as it becomes necessary. The structured settlement may pay for college or replace long-term lost wages with regular payments that can be used to meet care needs and/or household expenses. Again, the incremental nature of the payments is a financial planning device that times receipt of funds with the rhythm of needs.

When the beneficiaries of these agreements sell the right to future payments for a present cash buyout, they undermine the intent of the structured settlement and create further instability in a life already fractured by tragedy. By the time surgery is necessary, or the injured person’s savings are exhausted, the structured settlement payments may be gone as well. This could potentially shift the burden of care back upon the taxpayers as a provider of last resort.

More than just undermining careful financial planning that goes into structured settlements; the terms of these sales often result in a deep discount being taken on the funds by the seller. In effect, they give up tens or hundreds of thousands of dollars in future payments for an immediate lump sum payment. Companies charge significant fees ranging from 21 to 70 percent of the total value of the settlement. The predatory practices of these lenders leave many people surrendering much of the settlement without fully recognizing the tradeoffs.

SB 510 Will Protect Beneficiaries of Structured Settlement Agreements

To protect vulnerable individuals, California law requires court approval for the sale of a structured settlement agreement. Current California law requires that the sale be in the "best interests" of the person seeking to sell the settlement. However, the current law lacks detailed guidance for a judge when she is conducting a cost benefit analysis to determine if the liquidation of a structure is in the "best interests" of the seller. This lack of guidance results in inconsistent application of the law with potential disastrous consequences to both the seller and the State, which may become financially responsible for the injured party's medical care in the future.

SB 510, introduced by Senator Ellen Corbett, provides clarity to the petition and sale process providing clear, objective, criteria for the courts to consider when determining whether to permit a sale. Among other things, the court would consider:

• The reasonable preference of the person receiving payment;
• Purpose of the transfer;
• Whether structured settlement was intended to cover future income loss or medical expenses;
• Intention of the periodic payments;
• Potential need for future coverage of medical treatment;
• Whether the person receiving payment has other means of support;
• Whether the person receiving payment has received independent legal and financial advice; and
• The impact of such a sale on not just the seller, but his dependants, child support obligations, etc.

Additionally SB 510 requires that the court look at what is referred to as the "discount rate," the rate which is used by the purchaser in determining what fraction of the payment stream they will pay now, to see if it is in line with the current market rate. The law also requires that there be a full and clear disclosure of what the selling party would have received had they kept their structure, and the value of what they are giving up in exchange for immediate lump sum payment.

Some may argue that structured settlement agreements are too paternalistic; when someone is injured, that person should have the freedom to make their own decisions regarding any financial compensation they receive. These people fail to recognize that a structure is never forced upon a party; it is something that they elected as a careful financial plan when they were resolving their legal dispute. As such, these careful financial plans should only be disturbed when unforeseen circumstances dictate that the benefit of the change to the financial plan outweighs the significant costs. A strengthened review process, with clear guidelines and priorities, helps not only the court to make these decisions, it encourages and helps the seller to understand the significance of their decision, creating a time and process for reflection.

The proposed legislation will help to ensure consistency across decisions, force judges to consider all of the relevant factors and ensure that potential sellers understand the terms of the sale. Ultimately, this will help to protect people in California from predatory settlement purchases.

Note: Author Christopher Dolan is the President elect of the Consumer Attorneys of California and has helped in the drafting of the language of SB 510. He has testified before the Senate Judiciary Committee on numerous consumer protection bills, including SB 510.