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What Happens If The Insurance Company Holding Your Structured Settlement Goes Into Bankruptcy?

Law Blog

If you have been the victim of an accident that has compromised your ability to hold down gainful employment, you may have received structured settlement information from an insurer. Unlike other types of legal settlements which are paid in a single lump sum, structured settlements are paid out on a monthly or annual basis, to provide you with a steady stream of income for the rest of your life. But what happens if the entity responsible for paying this settlement files for bankruptcy? Read on to learn more about what you can expect, as well as how to protect yourself from a sudden reduction in payments.

Who is responsible for structured settlement payout?

In general, during the settlement, the defendant or his or her insurance company will pay a lump sum to another insurance company that provides annuities and similar products. This lump sum is invested by the recipient company, who is then obligated to pay you monthly or annual funds in accordance with the terms of your settlement.

Although purchased annuities have some bankruptcy protection under federal rules, structured settlements do not offer this same type of protection, which may make you vulnerable in the event of a bankruptcy.

What happens if the holding insurance company declares bankruptcy?

If the insurance company responsible for making your structured settlement payments files for bankruptcy protection, you may experience an immediate reduction in benefits until the bankruptcy has concluded. In one recent case, benefits were cut by more than 60 percent.

If the company emerges from bankruptcy after reorganizing its assets and debts, your payments may resume at their original level -- however, if the company liquidates, so may its obligation to continue your payments.

How can you protect yourself?

If you've not yet finalized your settlement, be sure to request that any entity to which the final payment responsibility is sold is licensed in your state. Each state has specific regulatory agencies that can ensure the fiscal health of these organizations, as well as go after them for repayment if they renege on their legal obligations. If a company is not licensed in your state, there are fewer enforcement options available.

If your settlement has already been finalized, you may wish to investigate a structured settlement buyout. In a buyout, a company pays you a lump sum based on the projected future value of your settlement payments. Although these buyouts are not available in all situations (you generally need to demonstrate an immediate need for the money), they can help reduce the odds that any portion of your settlement will be lost to bankruptcy.


2 December 2014