Turning IOUs into cash

A young woman in the Bronx wanted to go to college, but her family had few financial resources. She did, however, own one unusual asset: a legal settlement that involved future, uncollected payments.

Thanks to some quick work by Singer Asset Finance Company, a financial-services firm based in Boca Raton, Fla., the woman was able to sell her legal settlement and get an up-front cash payment. She now uses the money for college.

The woman held what are called "illiquid assets." These are present, or, more typically, future cash payments linked to insurance policies, lottery winnings, or legal settlements.

Individual brokers or financial consultants have long bought and sold illiquid assets. Typically, they sell them to other individuals, or financial institutions such as a bank.

But since the early 1990s, a new industry is slowly taking shape: A number of fairly sizable financial firms have sprung up to deal with illiquid assets. Such firms are often subsidiaries of insurance companies, such as Viaticus, in Chicago, a unit of CNA Insurance. Singer is a subsidiary of Enhance Financial Services Group Inc., in New York, a publicly traded company listed on the New York Stock Exchange.

These firms offer immediate cash payments to illiquid asset owners who may be deep in debt, facing the need to pay medical, legal, or household expenses.

The important point to understand is that "the people [selling illiquid assets] often do not have a lot of other options," in terms of raising cash, says Karen Barrett, chief marketing officer for Singer.

If they were to try to convert their assets, such as turning life insurance policies into cash, they would find it difficult if not impossible to do so through conventional financial channels, she says. But by going to a firm that specializes in illiquid assets, they can often have cash in their hands within three weeks, once necessary paperwork or legal work - such as going through a court administrator - is cleared.

Firms such as Singer will, in effect, buy illiquid assets, package them, and then sell them to institutional customers such as banks. Usually, the asset has to have a value of at least $25,000 to qualify for an up-front buyout.

Singer, for its part, has handled between 3,000 and 5,000 transactions involving more than $1 billion in illiquid assets since the mid-1990s.

Research suggests that the majority of those selling illiquid assets are not elderly, as some might be expect, but younger adults, between 25 and 45 years of age.

Typical examples of illiquid assets include:

*Structured settlements: These are monetary awards from a settled lawsuit. But the payout is structured over time, not made in one or two lump-sum amounts.

*Lottery winnings: In some states, such winnings are not given in lump-sum amounts, but must be paid out over many years.

*Inheritances and trusts that contain future payment streams.

*Annuities: These are periodic payments from a finance or insurance company that flow to the recipient over years.

*Seller-financed mortgages or notes: These involve persons who hold private mortgages or notes from a former home or business. If the recipient has received payments for a year or longer, the notes - and thus, the future "income stream" - can be sold.

*Viatical settlements: These are insurance payouts for people diagnosed with terminal illnesses who need to sell the benefits from life-insurance policies to raise cash, often to pay for more medical care.

In order to qualify for an up-front buyout, the policy "must have a face amount of at least $250,000," says a spokesman for Viaticus. Not all companies require such a high face amount, however.

Buying illiquid assets "can be very satisfying work," says Ms. Barrett, because we are helping people obtain money "when they may most need it."

(c) Copyright 1999. The Christian Science Publishing Society