What to Know Before Selling Your Disability Payments

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“Need money now? Our company can give you access to cash when you need it.”

If you have a disability and need emergency cash, this pitch might be appealing.

Companies are preying on people with disabilities who have structured settlements. A structured settlement gives you tax-free regular payments so you can meet your normal monthly expenses. But when something unexpected happens and you need money in a hurry, some companies try to get you to sell part of your disability settlement for quick cash. It’s called “factoring.” Before you sign on the dotted line, it’s important to know what you’re getting yourself into.

Questions to Ask

What does “factoring” mean for you? To get the cash quickly, you must sign over some or all of your disability settlement payments for a period of time. The lump sum payment you get in return is less than the settlement payments you sign over. So, you’re signing away money you need to live on.

If you are considering factoring, get answers to the following questions:

  • What are the costs? Get all costs in writing. Ask for the interest rate and any fees. Ask for a statement of how much money you get now versus how much money you are giving up in future settlement payments. This information may not be disclosed in ads or contracts, so it’s important to ask and get it in writing.
  • What are the tax implications? Getting a big lump sum payment can put you in a higher tax bracket. By contrast, your regular structured settlement payments are tax-free. Consult with a tax advisor for information and advice.
  • Can you cancel the transaction? Before you sign, get a written copy of the company’s cancellation policy.
  • What is your state law? Almost all states (except Wisconsin and New Hampshire) require court approval of factoring. That means that before the transaction can take place, a judge must decide that it is in your best interest.
  • Are there complaints about the company? Your local consumer protection agency or your state Attorney General’s Office can tell you if any complaints have been filed about the company.

Alternatives to Factoring

Before committing to factoring, weigh all your options.

  • If you’re considering factoring because you’re having trouble paying your bills, contact your creditors or loan servicer as soon as possible to ask for more time. They may be willing to work with you.
  • Consider a small loan from a credit union, bank or small loan company. A cash advance on a credit card may also be possible, but it may have a high interest rate. Find out the terms before you decide. Shop first and compare all available offers.
  • Contact your local non-profit consumer credit counseling service if you need help working out a debt repayment plan or developing a budget. These groups offer free or low-cost credit guidance.

To learn more about personal finance issues, visit Money & Credit.