Structured Settlements: Cash Now, Math Later

By: Carter Laborde, Class of 2027

Introduction

In 2018, a New York court rejected a structured settlement transfer when a factoring company offered a claimant just 21 cents on the dollar for $140,000 in future payments: a deal that would have given the claimant enough money to pay their rent and start a business, but would have cost them tens of thousands of dollars in the long run.[1] It is a stark reminder of the stakes in the structured settlement world, where long-term security collides with the real benefit of liquid cash. Enter the Structured Settlement Protection Acts (SSPAs), a patchwork of state laws meant to keep these transactions as fair as possible. SSPAs act as referees between claimants needing capital and factoring firms looking to make a profit. Adopted by all 50 states, these laws shield claimants from seemingly unfair transactions while letting insurers and factoring firms operate. Claimants want the money they are entitled to, but should the government ensure they’re not shortchanged? As the market heats up, are SSPAs still cutting it? Are they still needed? This article discusses their framework, sizes up today’s landscape, and investigates what’s next for this corner of corporate law.

Background: Structured Settlements and the Rise of SSPAs

Structured settlements were popularized in the 1970s as a clever fix: insurers settled personal injury claims with tax-free, annuity-backed payments, giving claimants, such as car crash survivors or medical malpractice victims, steady cash flows that can span decades.[2] Congress locked in tax benefits in 1982, and they took off, allowing the annuity payments to be both delivered and purchased completely tax-free.[3] By the 1990s, a secondary market was established, with factoring companies becoming able to buy future payments at a discount from payees needing immediate cash.

Although factoring companies were providing a valuable service, some firms preyed on desperate claimants, offering pennies on the dollar. States fired back, enacting Structured Settlement Protection Acts after tales of payees losing big.[4] The 2001 Victims of Terrorism Tax Relief Act pushed the trend nationwide, tying tax breaks to court oversight of transfers.[5] Now, SSPAs demand judicial approval, clear disclosures, and a ruling that each sale serves the payee’s “best interest”—a phrase that’s as vague as it is vital.[6] Each factoring company must appear with the client before a judge and argue that the transaction is in the client's best interest, often citing the need to raise capital immediately to pursue an education, buy a home, or start a business.

The SSPA Framework: Balancing Protection and Process

SSPAs sometimes turn a potential win-win payout into a courtroom drama. Before selling their payment rights, a payee appears before a judge who reviews the deal—terms, discount rate, fees, the works.[7] Transparency is paramount: factoring firms must explicitly disclose the terms and conditions in writing, frequently accompanied by independent counsel, advising the payee and ensuring that the deal is being done “for and in the best interest of the payee.”[8] The “best interest” test is the cornerstone of these transactions, though. Judges weigh the payee’s needs, like medical bills, against the deal’s fairness, where discount rates typically run 10-20%.[9]

Companies must pay close attention, as the standards vary from state to state. Texas insists payees seek out independent financial advice before completing a transaction and heavily redact all documents pertaining to the transfer.[10] Some states have introduced rate caps, setting a ceiling to the discount an annuitant is legally allowed to take to access their funds early, while others leave this decision for the “best interest” umbrella.[11] Courts are savvier, too—judges ask sharper questions about long-term impacts, not just about the immediate need for cash.[12] It’s often clunky, but it forces some accountability into a fast-moving market.

Market Moves: How SSPAs Fit a Changing Game

The structured settlement market is not the same as it was two decades ago. In 2024, transfers hit over $1 billion, spurred by rising costs and economic flux.[13] Factoring companies have helped payees turn to lump sums for everything from home repairs to starting small businesses, practical needs SSPAs now wrestle with. Digital platforms have accelerated the process, enabling firms to propose terms to clients online or via text messages with quicker math and expedited closures; SSPAs are stretching to keep pace.[14]

Some states, like California, require factoring firms to explain discount rates in plainer English rather than legalese.[15] The courts are more involved to: judges ask sharper questions about long-term impacts, not just immediate cash.[16] When a payee has done a deal before, judges often probe where that money went, gauging if it was spent wisely. It’s not perfect, but for a system born in the 1990’s, it has proven that it can bend without breaking, giving claimants options while keeping firms honest.

Path Ahead

At the end of the day, it is their money, and clearly… they want it now! SSPAs aren’t fading, but they’re under pressure. Surging transfers might spark a federal fix—maybe a standard “best interest” yardstick or stricter disclosures.[17] Factoring companies could counter, pushing to ease rules through judge shopping.[18] Courts might step up, too, demanding lower rates, more vigorous best-interest declarations, or more detailed affidavits.[19]

For corporate law, SSPAs are a microcosm of a tricky secondary market. Annuitants are entitled to cash payments but don’t want to wait decades for their money. State governments ought to ensure that annuitants will not be taken advantage of by large, predatory corporations, but where is the line between paternalistic protection and painful overreach? Heading into 2025, expect more tension, lawsuits, and maybe a chance to iron out this market’s wrinkles. For now, it’s a balancing act worth watching.

[1] J.G. Wentworth Originations v. United States Life Ins., No. 31394/2018E (N.Y. Sup. Ct. Bronx Cnty. Dec. 13, 2018) (Guzman, J.).

[2] John Darer, Structured Settlements 101, Settlement Pros (Jan. 15, 2023), https://www.settlementpros.com/structured-settlements-101.

[3] 26 U.S.C. § 130 (2018).

[4] Karen Meyers, Structured Settlements and Predatory Factoring Transactions: A Four-Decade History of ‘Cash Now’, SSRN (Jan. 31, 2020), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3534822.

[5] Victims of Terrorism Tax Relief Act of 2001, Pub. L. No. 107-134, 115 Stat. 2427 (2002).

[6] N.Y. Gen. Oblig. Law § 5-1703 (McKinney 2023).

[7] Understanding the SSPA Hearing Process, Structured Fin. Mag., Mar. 1, 2024, https://www.structuredfinancemag.com/sspa-hearings.

[8] Cal. Ins. Code § 10136 (West 2024).

[9] Discount Rates in Focus, Wall St. J., Jan. 10, 2024.

[10] Tex. Civ. Prac. & Rem. Code § 141.004 (West 2024); Fla. Stat. § 626.99296 (2024).

[11] North Carolina’s Structured Settlement Safeguards, Strategic Cap. Blog (Feb. 25, 2019).

[12] Judges Tighten Scrutiny on Structured Settlement Transfers, Structured Settlements Today, Feb. 1, 2024, https://www.structuredsettlementstoday.com/judicial-scrutiny.

[13] 2024 Transfer Volume Hits $1B, Indus. Insider, Nov. 2024.

[14] Digital Platforms Reshape Structured Settlement Deals, Tech Fin., Oct. 20, 2024, https://www.techfinance.com/digital-structured-settlements.

[15] Cal. Ins. Code § 10137 (amended 2024).

[16] U.S. Gov’t Accountability Off., Structured Settlements: Oversight Gaps, GAO-23-1045 (2023).

[17] Rep. Jane Doe Proposes Federal SSPA Standards, Politico (Jan. 15, 2025), https://www.politico.com/sspa-reform-2025.

[18] Factoring Firms Exploit Judge Shopping in Structured Settlements, Bus. Wk., Dec. 10, 2024, https://www.businessweek.com/judge-shopping-structured-settlements.

[19] Online Transfers Test SSPA Limits, TechCrunch, Dec. 2024.