History of Factoring
History of the Factoring Industry
Factoring is a common term used in finance to describe a purchase of accounts receivable. In that context, factoring transactions have been around at least 5,000 years since they were mentioned in Hammurabi’s Code. On this site, the term “factoring” means the purchase of the right to receive one or more future periodic payments resulting from a legal settlement and usually funded with a qualified structured settlement annuity. The payee assigns his or her right to receive future periodic payments in exchange for a discounted lump sum.
Circumstances often change and factoring is necessary if people need a way of accessing liquidity.
The structured settlement factoring industry first became significant in the early 1980′s after Congress added Section 130 and modified Section 104 of the Internal Revenue Code. These changes made it clear that personal injury victims would not be taxed on future periodic payments of compensatory damages and that the defendant could deduct the amount paid for the assignment of the obligation to make those future payments.
Structured settlements are not liquid. IRC 130(c) requires the payments to be fixed and determinable. They cannot be assigned, accelerated or encumbered in any way. Companies emerged to provide that liquidity by purchasing the right to receive the future payments for cash. Assigning a future payment that is contractually unassignable can lead to conflict and factoring has always been controversial. Attorneys and settlement planners often use the illiquidity of structured settlements to insulate clients from the consequences of future poor decision making. After all, the ability to responsibly manage a large amount of money requires education, discipline, experience and skills that relatively few people possess. However, since life is unpredictable and a little cash now is often more attractive than more cash later, an industry emerged to purchase those future payments. This industry was often referred to as the grey market because it was obviously controversial and it was fairly unregulated. Abuses were rampant and discounts were high. The life insurance companies that issued annuities would often fight against the rights of the purchasers to receive funds. This risk pushed the factoring industry to hide from the insurers to avoid the risky and costly conflicts that often ensued.
Annuitants who had settled their claims for future periodic payments and who now needed liquidity were often caught in the crossfire.
Annuitants who had settled their claims for future periodic payments and who now needed liquidity were often caught in the crossfire. Since the factoring industry was not heavily regulated, abuses were rampant and since the transaction was risky from the standpoint of the purchaser, the discounts were steep. So, people who were already in desperate circumstances were getting a fraction of what they should.
On July 1, 2002, IRC 5891 became law. This bill effectively put a prohibitive penalty tax on any factoring transaction of structured settlement annuity payments that was not qualified. To become qualified a transaction must receive prior court approval by a judge charged with determining whether or not the transfer is in the best interest of the seller and his/her dependents. In addition, almost every state had enacted transfer laws to regulate the purchase of future payments. These laws generally require disclosures to be made, notice to interested parties, professional advice, and court supervision and approval.
These changes have helped to create a better environment for a person who truly must sell one or more future payments. Today, many of the abusive practices that were common in the past have become rare. However, the wider acceptance of the industry has led to new problems including excessive advertising, cumbersome compliance costs, and delays. Some of the players in the marketplace still use pervasive marketing and high pressure sales tactics to push annuitants into transactions that should have been avoided. Bentzen Financial does not participate in direct advertising or high pressure sales tactics. Instead, we seek to give professional advice to the few annuitants who truly need our service. We try to remove as much of the hassle from the process as possible and we always try to secure the best price we can offer. By working primarily through referrals from professionals, we cut our marketing costs and work with annuitants who really need our services.