Structured settlements are a way for an entity to pay awards won in a lawsuit over a period of time, whether it be monthly, bi-monthly or yearly. They’re usually a good thing for a cash-strapped situation, but some aspects of it need to be considered before venturing into the settlement loan territory.
Let’s get out definitions straight: A settlement loan when a provider (usually a bank or financial institution of some kind) buys out your remaining settlement payments for one large sum paid out at once. Sometimes these are available before the verdict is decided (called pre-settlement loans).
Here’s some of the things to think about:
- As with windfalls as of any kind, the top disadvantage is taxes. This income in most cases is considered taxable, and you’d fall into the self-employed category with this income, since SS and Medicare aren’t being withheld from it. Talk with a tax person who’s dealt with settlement loans before.
- The next one is of course: You won’t get all your money. The provider will get a percentage of it by paying your lump sum at once; this is how they stay in business. There’s no such thing as a free lunch, the old saying goes. The provider can take up to 30% of your total in some cases.
Make sure you’re prepared for these issues and investigate settlement loans carefully before taking one out.