structured settlement payments (SSPAs) that mandate that courts have hearings to determine whether the sale is in the “best interest” of a claimant and his or her dependents. If a judge determines that the transaction is in the “best interest” of a claimant and its dependents and that the sale complies with the requirements in the SSPA, the sale will be approved and the factoring company will purchase the payments from the claimant in return for a lump sum of cash. Included in whether a sale is in the best interest of a claimant and any dependents, a major factor is the “cost” of the transaction. This necessarily includes whether the “discount rate” (discussed later in this article) charged and the resulting purchase price is “fair and reasonable”.
Among other requirements in the SSPAs a factoring company generally must provide to a claimant:
• A separate written Disclosure Statement in advance of the funding date showing:
o An itemized list of how the factoring company has calculated the present value of payments and gross amounts payable to the claimant in exchange for the payments;
o The net amount payable to the claimant after deducting all itemized commissions, fees, costs, expenses and other items that may be charged by the factoring company.
Judges must analyze these Disclosure Statements, among other evidence, and understand the “cost” of a transaction including how the discount rate is calculated and why a claimant is sometimes receiving a certain amount of money in return for a disproportionately larger amount of money. Judges must then determine whether the discount rate is fair and reasonable and in a claimant’s and its dependents’ “best interest”.