Litigation

A structured settlement is an important financial planning tool for tort victims, if properly used. Like any financial product it has its place. But, in my opinion, an aggressive approach that involves emphasizing the factorability of a structure as a settlement planning tool to convince your client that he or she should take a bigger structured settlement is trouble. Yet beware that some bamboozled brokers tarnish the settlement planning process by doing just that.

For those that use this tactic I see a huge potential malpractice issue.

What worth is a settlement planning approach that has your client losing money in mind?

"Becky Gomez" is at a mediation and accepts a structured settlement that includes a $50,000.00 lump sum  on October 15, 2012, using an A+XV New York rated life insurer. The cost of this element of Becky's recovery is $42,572.50 with a August 15, 2008 purchase. That amounts to a 3.93% rate of return.

If Becky then tries to factor the payment almost immediately, and assuming the Court would approve the  transaction,  using the factoring effective discount rate* calculator we learn that

• With a  8.85% effective discount rate Becky would get $35,000 today  which amounts to 82.21%  of  this element of recovery
• With a 11.2 % effective discount rate Becky would get $32,000 today  which amounts to 75.16%  of  this element of recovery
• With a 13.37% effective discount rate Becky would get $29,500 today which amounts to  69.29% of this element of recovery
• With an 18.01% effective discount rate Becky would get $24,930 today which amounts to  58.56% of this element of recovery

Regardless of the effective discount rate, there is a BIG LOSS on the original $42,572.50 investment. How do these losses of the recovery in such a short period of time compare with the stock market? An 18 % effective discount rate would result in a loss of capital to the plaintiff which exceeds virtually every bear market in the S&P 500 since in the last 35 years! Ironically the settlement planners pushing this "crack" or "crock" are the same ones who say you should  take a structure because it's free of market volatility.

To quote a friend "If this is Kansas, how come I don't see Dorothy and Toto?"

If a settlement planner or structured settlement broker has taken fees for this advice it is nothing short of scandalous. In the structured settlement industry there is currently a story circulating of a broker who took a massive fee on a factoring deal within one year of structured settlement creation. We know by her own admission that 90% of Bentzen's clients ARE taking fees. Is your structured settlement broker or settlement planner one of them?

In the example case wouldn't the settlement planner be more responsible and the plaintiff be better off in the first place by addressing liquidity needs through placing a portion of the recovery in a Settlement Conservation Trust, 130X  or recovery management trust where liquidity is not an issue?

* effective discount rate is the factoring discount rate including all charges, commissions and fees.