Structured Settlement

Structured settlement summary:

• A structured settlement is an agreement to pay off negotiated debt in installments rather than a lump sum. This option could make debt relief more manageable if you can’t pay the full settlement amount all at once.

• A structured settlement gives a debtor more time to resolve their debt fully.

• Creditors benefit by receiving some of the money sooner.

Structured settlement definition and meaning

When you enter into a debt relief plan with a creditor, your settlement may be structured. That means you promise to pay the negotiated amount over time in a series of smaller payments rather than all at once. 

Key concept: A structured settlement allows a debtor to settle debt through installment payments.

More about structured settlement

Debt relief is a process of negotiating with creditors to accept repayment of a portion of your debt and forgive the rest.

While debt relief often involves paying a lump sum, some creditors will agree to accept regular payments. This is considered a structured settlement. 

A structured settlement can be a highly effective way of dealing with debt. You could get partial debt forgiveness without having to make a big one-time offer to your creditor. In turn, the creditor gets something without having to wait. It’s a chance for the creditor to make sure they don’t walk away with nothing, which is always a possibility when a debtor is going through a financial crisis.

Factors to consider include:

• Creditor cooperation: Not all creditors will agree to settle a debt. Among those that do, not all will agree to accept payments through a structured settlement. That said, most creditors would rather receive some money back than none. If a structured settlement can help them accomplish that, they may be more open to the arrangement.

• Impact on your credit score: Structured settlement payments might not be reported as on-time payments on the account. Resolving debt, whether as a lump sum or a structured settlement, typically has a negative impact on your credit standing.

• Fees: You can negotiate a structured settlement on your own or sign up with a debt relief company for help. If you work with a professional debt relief company, they’ll charge a fee for their service. 

• Potential tax implications: Unless you’re insolvent, forgiven debt may be considered taxable income. 

Structured settlement: a comprehensive breakdown

You could work directly with your creditors to negotiate a settlement or sign up with a debt relief company that will negotiate on your behalf. If you're more comfortable handing negotiations off to trained professionals, here's what you can generally expect:

• You get a free debt evaluation. A debt expert will review your situation and let you know if you’re a candidate for debt relief.

• You decide where you’ll get the money to offer creditors. You’ll have to pay something toward your debts. If you have savings or could sell things, that’s a good start. But it can be hard to find cash when you’re already struggling. Most people seeking partial debt forgiveness stop paying their debts during the debt relief process so they can afford to save up money to offer their creditors. Stopping payments also sends a clear signal to your creditors that you’re in financial distress. When you miss payments, expect a negative impact on your credit standing. It’s possible to rebuild your credit after debt relief, especially after you get rid of some or all of your debt. 

• You build up funds for resolving debts. The debt relief company will set up a dedicated account for you at an FDIC-insured bank. The money is yours and you always control it. Most people add money to their account via an automatic monthly transfer. 

• The company will enter into negotiations. Once there's enough money in the dedicated account, expert negotiators reach out to your creditors one by one. The goal is to get creditors to accept a reduced amount. 

• You approve each agreement. When the debt relief company reaches an agreement with one of your creditors, the details are given to you for your review and approval.

• The debt relief company releases the agreed amount. Once you approve an agreement, the first payment is made from your dedicated account. The debt relief company may then take its fee from the same account.

How creditors are paid depends on how the settlement was structured. Sometimes, a debt is resolved with a single lump-sum payment. Other times, the creditor agrees to a structured settlement. In either case, since the debt was settled for less than owed, the remaining amount due is forgiven. 

Structured settlement example

Imagine you’re attempting to resolve two debts. The first debt is for $3,500 owed to a credit card company, and the second is a personal loan with a balance of $15,000. You have enough money on hand to offer the credit card company a single lump-sum payment of $1,800 to resolve the debt. However, you know you don't have enough cash to settle the personal loan in one payment, so you ask for a structured settlement. 

For the sake of this scenario, let's say the lender agrees to resolve the $15,000 debt for $9,000. In that case, you could ask for a structured settlement in which you make a monthly payment of $375 for 24 months.