Structured Settlement Protection Act

A Structured Settlement Protection Act (SSPA) is state legislation, adopted in some form by every U.S. state and the District of Columbia, that requires a payee seeking to sell future structured settlement payment rights to obtain advance approval from a state court before the transfer can proceed. The typical SSPA requires the factoring company to give the payee written disclosure of the discount rate, the effective annual interest rate implied by the transaction, and the difference between the payments' total value and the lump sum offered; requires that the payee receive, or knowingly waive in writing, independent professional advice; and requires the court to find the transfer is in the payee's best interest — and, where the payee has dependents, in the best interest of those dependents as well — before entering an approval order. These state statutes work in tandem with the federal excise tax under Internal Revenue Code Section 5891, which imposes a substantial tax on the factoring discount in any transaction not approved by a qualified order issued under a state SSPA, giving factoring companies a powerful financial incentive to obtain court approval rather than attempt an unapproved transfer. Courts reviewing SSPA petitions have denied or modified transfers where the discount rate was found excessive, where the payee's stated need was not credible or was better served by a smaller transfer, or where the disclosure requirements were not properly met.

The federal excise tax under Section 5891 is the real enforcement mechanism behind SSPA compliance — a factoring company that skips court approval does not just risk a void transfer, it exposes itself to a tax that generally erases the profitability of the deal, which is why every credible factoring company in the market structures transactions around the court approval process rather than around it.

Because courts weigh the payee's stated need and the discount rate's fairness rather than rubber-stamping applications, factoring companies calibrate offered pricing and required documentation to survive judicial scrutiny, not just to close the transaction with the consumer.