There’s sometimes a thin line between consumer protections and big-government meddling: If you’re determined to squander your money, should the government really try to stop you?
For instance, if you had won the Mega Millions lottery Tuesday evening, you would have been asked whether you wanted to receive the entire $277 million in monthly payments over 30 years or a lump-sum payment up front of a little more than half that amount, $149 million.
In many cases, the better deal is the full $277 million — particularly for people with little to no financial self-control or expertise — with payments starting at $4 million a year and continuing annually for decades. But if you’re determined to make the other choice, the governments that run that lottery are going to let you; indeed, they’re going to facilitate it. That’s one of the problems with government-sponsored gambling, but that’s a topic for another day.
Today’s topic is about a similar type of financial arrangement, which involves people who won the money not because they gambled but because they were in a terrible accident or had some other tragedy befall them, they filed a lawsuit, and they won a huge judgment or settlement.
Often, the plaintiffs receive the money in what are called structured settlements — monthly, tax-free payments for the rest of their lives. It’s not so they’ll receive more money, but so they’ll have a guaranteed stream of income, reducing the risk of blowing it on bad choices. Sometimes the plaintiffs ask for the structured settlements, and sometimes judges choose that, for instance because the plaintiff is a minor or someone who is being paid because an accident caused a traumatic brain injury. In either case, a judge approves the settlement.
But sometimes the plaintiffs run into financial trouble and need money now, so an entire industry has grown up around purchasing the future structured settlement payments for a smaller up-front payout, sort of like the lottery choice in reverse. And some of those arrangements make taking the lump-sum lottery payment look like a brilliant financial strategy for anybody.
Myrtle Beach’s Sun News, working with its parent company McClatchy Co., reviewed hundreds of these sales in South Carolina over the past eight years and found that people who sold their structured settlements for lump-sum payments received on average 25 cents on the dollar from the purchasers, known as factoring companies. In many cases, the payments were less than 10 cents on the dollar. This is despite a state law that requires a judge to vet these sales, and sign off on them only if they are “in the best interests” of the seller.
Powerful state senators in both political parties already were vowing to find a way to provide the consumer protections that state law promises but doesn’t deliver when S.C. Chief Justice Don Beatty stepped in earlier this month to impose an elegant — if incomplete — fix: Up until now, most sales were approved by equity court judges — known as masters-in-equity and special masters. And the factoring companies were taking the requests to a handful of judges who rarely if ever rejected them — that is, they were venue shopping for the friendliest judges.
Going forward, Justice Betty wrote in a Sept. 7 order, only Circuit Court judges can approve structured settlement sales in South Carolina. That means, Senate Judiciary Chairman Luke Rankin told Columbia’s State newspaper, the only way to “break up these long-term vetted and court-approved settlements" is to go “back before the same court to unwind the clock or prove to the satisfaction of the court that this is not predatory and/or inequitable to the ultimate holder of that future income stream."
It’s a good change, but while it’s more likely, there’s no guarantee the circuit judges will be any more protective than the equity judges. Besides, the order lasts only as long as this chief justice or his successor says so. That means legislative action is needed.
The easiest and most obvious change is to stop venue shopping, by requiring the request to be brought in the county where the seller lives or works. The Legislature took similar action to protect large corporations when the Murdaugh law firm was channeling lawsuits against them from across the state and nation into Hampton County, where it could count on friendly juries. It’s certainly appropriate to protect consumers by ending a system that allows predatory financial institutions to channel these purchases to friendly judges.
Lawmakers also should strengthen the part of the law that requires the factoring companies to inform the sellers that they can seek independent professional advice about selling their settlements. The Sun News reports that some states require sellers to take advantage of that offer and meet with an independent financial adviser. A new law in Minnesota requires judges to appoint an independent adviser, paid by the factoring company, to represent the best interests of a seller with documented mental health issues. That strikes us as an absolute minimum our lawmakers should do.