Structured settlement scams: the common schemes and how to protect your payments

Structured settlement scams generally take one of six forms: official-looking letters from fake judges, lawyers or insurers; demands for an upfront fee before a lump sum that never arrives; "independent advice" that is secretly paid for by the buyer; pressure to skip or shortcut the court approval your state requires; cash advances dressed up as something other than a loan; and deals that are legal but priced so badly they amount to the same thing. Most companies that buy settlement payments are legitimate businesses, but the sector has drawn enough abuse that the Federal Trade Commission, the Consumer Financial Protection Bureau and several state attorneys general have published warnings and brought cases.

This guide explains why recipients are targeted, what each scheme looks like in practice, the red flags that appear again and again in enforcement actions, and the practical checks you can run on any company and any offer.

Why structured settlement recipients are targeted

A structured settlement is a predictable stream of payments, usually tax-free under IRC §104(a)(2), backed by a life insurer. To a buyer that is an attractive asset. Three features make the recipient an attractive target too.

First, the payments are often known. Settlement approval hearings and transfer petitions are court records, and many states' filings are public, so a company can learn who receives what and when. Second, many recipients were injured young or received the settlement for a childhood injury, and some have cognitive impairments arising from the injury itself. Third, the gap between the present value of the payments and what a buyer offers can be very large, so the incentive to close quickly is strong. If you have wondered why a structured settlement company is calling you, that combination is the answer.

Scheme 1: letters from a fake judge, law firm or insurer

The most direct fraud is impersonation. In a case settled by the Maryland Attorney General in 2018, a group of affiliated funding companies was accused of marketing to annuitants with letters that appeared to come from a judge and a law firm that did not exist, and from insurers that did not exist, in order to prompt the recipient to call. The companies agreed to restitution, penalties and a multi-year ban from doing business in the state.

The giveaway is that no court, no insurer and no law firm you have not hired will write to you urging you to sell payments. A court writes only in connection with a case you are a party to. Your annuity issuer writes about your contract, not about selling it. If a letter claims a judge has "pre-approved" a sale, or an insurer is "releasing" your payments, treat it as marketing at best.

Scheme 2: pay a fee first, receive nothing

The FTC's consumer guidance on selling settlement and disability payments warns that a company offering quick cash and a way around the court process may be luring you into a scam, and that the lump sum may not be real. In practice the hook is a processing fee, a "court filing deposit" or an insurance premium that must be paid before the money is released. A legitimate transferee is paid out of the transaction. It does not ask you for money up front, and its costs are disclosed in the statement the state law requires before you sign.

Scheme 3: "independent advice" chosen and paid for by the buyer

Most state Structured Settlement Protection Acts require that you receive, or expressly waive, independent professional advice before a transfer is approved. The purpose is to put an adviser between you and the buyer. The scheme defeats it by having the buyer pick the adviser.

In 2016 the CFPB sued a Maryland funding company and its principals, alleging that they steered sellers, many of them lead-paint poisoning victims, to a lawyer who was paid by the company and gave only cursory advice. The company's own internal description of its target customers was quoted in the complaint. The matters were resolved by stipulated judgments and consent orders that, among other things, bar the defendants from misrepresenting their relationship with providers of independent professional advice. Maryland separately passed a law, effective in October 2016, requiring companies that buy settlement payments from Maryland residents to register with the Attorney General, and the Attorney General sued the same group under the state consumer protection act.

The rule for you is simple: choose your own adviser, pay them yourself, and be suspicious of any adviser whose name the buyer supplies, however convenient.

Scheme 4: skipping or shortcutting the court

Nearly every state requires a judge to approve a transfer of structured settlement payment rights and to find that the transfer is in your best interest, taking into account your dependants. Federal law reinforces this: under IRC §5891, a buyer that acquires payment rights without a qualified court order owes a 40% excise tax on the discount. A legitimate buyer will never try to avoid the hearing because the hearing protects the buyer too.

So any suggestion that the court step can be "handled internally", that you can sign an assignment now and "sort out the paperwork later", or that you should sign a power of attorney so the company can appear for you, is a serious warning sign. Watch also for a petition filed in a county or state you have no connection with. Several states amended their acts after buyers were found steering petitions to friendly courts. Our guide to the court approval process explains what a proper hearing involves and what the judge is required to review.

Scheme 5: cash advances and "loans" against your payments

A structured settlement cannot be used as collateral for a conventional loan, and the payments cannot be assigned without court approval. Companies know this, so some offer a "cash advance" that is in substance a sale of a small slice of your payments, or a pre-transaction payment that is deducted from the eventual lump sum. In the Maryland case above, pre-transaction payments described as signing bonuses were among the practices challenged. The problem is not that an advance exists; it is that the cost is rarely disclosed as an interest rate, and it ties you to that buyer before the court has looked at anything. See our explainers on the structured settlement cash advance and on the truth about structured settlement loans.

Scheme 6: legal, approved and still a bad deal

Not every bad outcome is a fraud. A transfer can go through the court, with every disclosure made, and still leave the seller with a fraction of what the payments were worth. Two patterns recur:

• A very high discount rate. The state-required disclosure shows the discounted present value of the payments sold and the effective annual interest rate implied by the price. If that rate is far above what a bank would charge on a secured loan, the deal is expensive even if it is lawful. Our article on the structured settlement discount rate shows how to read that figure.
• Serial sales. Some sellers are brought back for a second, third and fourth transaction until nothing is left. Courts increasingly ask about prior transfers for this reason, and you should expect to be asked.

A judge's approval confirms the process was followed and the deal appeared to be in your best interest on the evidence presented. It is not a certificate that the price was fair.

Red flags that appear in nearly every case

• Contact that you did not initiate, especially letters imitating a court, insurer or law firm.
• Any request for money from you before you receive the lump sum.
• Pressure to sign within days, or an offer that "expires" before you can get advice.
• An adviser, notary or lawyer supplied by the buyer.
• Talk of avoiding, speeding up or relocating the court hearing.
• A request for your Social Security number, bank log-in or annuity contract before you have seen a written quote.
• A quote that does not state the discounted present value and the effective annual interest rate, both of which your state act requires in the disclosure statement.
• Reluctance to confirm the company's legal name, address and the name of the entity that will actually appear in court.

How to verify a company and an offer

1. Check the state attorney general. Search for complaints and enforcement actions, and where your state keeps a registry of settlement transferees, confirm the company appears on it.
2. Call your annuity issuer. Use the number on your own statement, not a number in the letter. The issuer can confirm what payments you hold and will tell you whether it has received any assignment paperwork in your name.
3. Ask for the full disclosure statement in writing before anything else. Your state's Structured Settlement Protection Act sets out what it must contain. Compare the effective annual interest rate with other quotes.
4. Get at least two competing quotes for the same payments. Legitimate buyers compete on price.
5. Choose and pay for your own adviser. An accountant or attorney who has no relationship with the buyer.
6. Read the petition yourself before it is filed. Check the court, the payments listed and the amount you will receive against the quote.
7. Slow down. The payments are not going anywhere. Any offer that cannot survive a two-week pause is not one you want.

Our guide on how to sell a structured settlement covers the legitimate process end to end, and the companion piece on the Structured Settlement Protection Act explains the rights your state law gives you.

If you have already signed something

You have more options than the company will tell you. Many state acts give you a cooling-off period after signing a transfer agreement, so check the statute for your state. Until the court order is entered you can withdraw your consent, and you can appear at the hearing to tell the judge you no longer wish to proceed. If an order has already been entered on the basis of a misrepresentation, speak to an attorney about whether it can be reopened.

Report the conduct to your state attorney general, to the FTC at ReportFraud.ftc.gov, and to the CFPB, and tell your annuity issuer in writing that you dispute any assignment. If you were asked to pay a fee, contact your bank or card issuer immediately.

Frequently asked questions

Are structured settlement companies a scam?

Most are regulated businesses that buy payment rights through a court-approved process. The scams involve impersonation, upfront fees, captive advisers or attempts to avoid the court. A legitimate buyer welcomes the hearing and gives you the full disclosure statement without being asked.

Can a company take my structured settlement payments without my agreement?

No. Payment rights cannot be transferred without your signed agreement and a court order under your state's Structured Settlement Protection Act. A buyer that acquires payments without a qualified order also faces a 40% federal excise tax under IRC §5891. If a company claims otherwise, it is lying.

How do I know if a letter about my settlement is real?

Check who it is really from. Courts write only about cases you are a party to, and your annuity issuer writes about your contract, not about selling it. Call the court clerk or your issuer using a number you find independently, never one printed in the letter.

What is a fair price for structured settlement payments?

There is no single answer, which is why the disclosure statement matters. Compare the effective annual interest rate across at least two quotes, and weigh it against the cost of alternatives such as a secured loan or a hardship arrangement with your creditors. Our article on the discount rate shows how the figure is calculated.

This article is general education, not legal or financial advice. State transfer laws, registration requirements and consumer protections differ and change, so check your state's Structured Settlement Protection Act and consult an independent attorney or accountant before signing anything.