If you’re the plaintiff in a personal injury or similar claim and win your case, you could find yourself awarded a large amount of cash. But you may not necessarily get that money in one lump sum. Instead, monetary awards may be disbursed over a longer period in what’s known as a structured settlement.

A structured settlement can provide a source of tax-free income over a long period. But for someone who needs the money right away — perhaps due to the injury that landed them in court in the first place — cashing out the structured settlement could be an option. However, it’s important to consider the benefits and downsides beforehand.

When you cash out a structured settlement, you transfer the rights of your structured settlement to a third-party company. In other words, the court will make your settlement payments to the company instead of you. In return, the company offers you a lump sum of money immediately. You’re essentially selling your structured settlement to the company (usually at a discount).

Cashing out a structured settlement requires finding a company to sign an agreement with, but some additional steps are also needed:

1. Compare cash settlement companies: It’s important to compare your options and find the best one. You may find that certain companies are more reputable or will offer a larger payment for your settlement.
2. Consider hiring a lawyer: Deciding to cash out a structured settlement — especially a large one — is a major financial decision. Additionally, you’ll have to go to court to have the deal approved. For those reasons, it may be worth hiring an attorney.
3. Sign a contract: Once the cash settlement company offers you a quote and you accept it, you’ll have to sign a contract to complete the transaction. Be sure to read the terms and conditions carefully before signing and ask any questions you may have.
4. Take your case to court: Cashing out a structured settlement involves changing a court-ordered payment, meaning you need the approval of the court. The judge should ensure the transfer is in your best interest and that you understand the agreement you’re making. The judge will also take into consideration why you’re deciding to cash out your settlement.
5. Receive your lump sum: Once you’ve finalized your agreement and the court has signed off on it, you’ll receive your lump sum payment. After this point, you’ll no longer receive your structured settlement payments.

When you cash out a structured settlement, you won’t get a lump sum of the same amount you planned to receive through your settlement. Instead, cash-outs are usually subject to a discount rate, which is the percent the payment is reduced.

The discount rate you’re offered will depend on several factors, including the size of the settlement, the payment period, the company you’ve chosen, and more. The company may consider economic factors such as expected future interest rates.

Suppose you have a structured settlement of $100,000 where you’re set to receive $10,000 per year over 10 years. If a company offers you a discount rate of 15%, your lump sum payment from cashing out would only be $85,000. The cash settlement company, on the other hand, would still receive the entire $100,000.

The amount of time it takes to receive your money from cashing out a structured settlement may depend on a few factors, including how long it takes to get court approval. You can expect the process to take anywhere from 45 to 90 days. Keep this time frame in mind when choosing a company, especially if you have a certain period in which you need the money.

It’s clear that cashing out a structured settlement can have some benefits, especially if you have a dire financial need. However, there are also some major downsides to consider.

While cashing out a structured settlement may seem like your best option, there are some alternatives that may be more beneficial in the long run.