Structured settlements are financial awards made against one party for the benefit of another party, where the receiving party is compensation at the expense of the other party, usually in settlement of for instance a workplace, personal injury awarded or wrongful death compensation claim. Rather than receiving all the compensation award in full upon settlement, they provide for the award to be paid via a series of payments at agreed periodic intervals. The perceived benefit is that this reduces the likelihood of the award being spent unexpectedly shortly after the compensation is received. They are considered particularly appropriate for recipients who may be lacking maturity at the time of the award or otherwise be considered vulnerable.
A structured settlement loan is an arrangement whereby the beneficiary takes a loan using the structured settlement payments as collateral for the loan. In the first instance and even if the settlement provides for an immediate payment, the first payment may not be received until several months after the date of the settlement, and if the beneficiary needs funds quickly they can chose to obtain funds faster via a loan, and then pay back the loan upon receipt of the future payment. In addition to this form of ‘bridging loan’, there may be instances where after a period of time after the award the beneficiary has a change of circumstances or priorities, and needs to access monies to fund certain life events such as home purchase or an educational course, or perhaps just to pay off debt. In these circumstances the beneficiary could choose to take out a lump sum loan as a means to release funds, and then arrange for the loan to be paid back from the future periodic payments. A loan should be differentiated from selling the right to the payments outright. This is an option also available to beneficiaries of structured settlements, however, there is a subtle difference.
Before taking a loan, a beneficiary is best advised to consider whether this course of action is genuinely in their best interest. It is advisable for the beneficiary to be candid with themselves and ask whether the financial situation they are seeking to alleviate has been created by poor money management skills. If this is the case the receipt of a large lump sum of readily spendable money could actually make the situation worse, as it may just support a cycle of poor decision making, without forcing the beneficiary to address the underlying issues. In any event it is advisable to obtain professional financial advice before proceeding.