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Can I Use My Structured Settlement Payments as Collateral?

On the surface, it would seem to be really simple to use your structured settlement payments as collateral for a loan. As a result of a structured settlement, you own an asset with real value: your periodic annuity payments. The payments are issued by a highly rated life insurance company and are guaranteed by that issuer.

Plus, the payments are automatically deposited right into your bank account. It is your money that will come without fail. Surely, it can be used to get a loan. Unfortunately, this simply is not the case. But, why is that?

Why You Cannot Use a Structured Settlement as Collateral

First of all, the insurance company that owns your structured settlement payments will not acknowledge a bank’s lien on the payments or policy. Secondly, even if you told them to do so, the life insurance company that issues your payments will not agree to redirect your payments to a bank or any other third party.

So, while you are clearly sitting on great collateral, if you were to default on the loan, the bank would not have any legal mechanism for taking possession of the right to receive the payments. Banks just do not have any use for this type of collateral.

You Can Still Get a Loan

Though you cannot use your structured settlement as collateral for a loan, you can still get a loan. You can get two basic types of loans:

  • Unsecured Loans – For this type of loan, nothing is provided as collateral. Based on your signature and your credit score, you are lent money. Nothing is taken away from you if you default. With some banks, you can improve your chances of being approved for a personal loan by putting your structured settlement payments on your loan application as other income.
  • Secured Loans – Collateral is needed to get a secured loan. The collateral can be seized if you fail to repay your loan. When you buy a car or house, you generally get this type of loan. You will not get court approval to use your structured settlement as collateral, but you may have other objects of value that can be used.

Last Ditch Effort: Selling Your Structured Settlement

If you are unable to get a secured or unsecured loan and you really need the money, then you may be able to sell your structured settlement payments. There is a legal process put into place by Congress that allows you to liquidate your structured settlement by selling it to a third party for a lump sum.

Before you can sell your structured settlement, the buyer must petition the court per federal law. Then, pursuant to state law, they must obtain a qualified order from the court. This is not always easy to do. You and the buyer must prove to a judge that the deal is in your best interest and that you have a real financial need for receiving the money immediately.

Also, even if the deal is approved, you may only get about 60 percent of your total settlement amount. It pays to avoid selling and exploring other options first.