It's easy to construct scenarios where the closing prices are fair - even generous. It's also totally irrelevant.
This is a local article. Many of the problems it points out are specific to the weak legal protections in Maryland. It calls out specific people and companies, and specific conflict of interest issues. Talking about structured settlement pricing or mental impairment in the abstract really isn't relevant. Also, maybe read the whole article before commenting.
Without an investment context (i.e. comparing investing $63k for 35 years, to investing the settlement payments for 35 years, which is the valuation for the company that ripped her off), the nominal amounts are such that she sold $573k of payments for $63k. And that $573k in today's dollars is worth about $340k. She didn't even get 20c on the dollar.
It'd literally be like you forgoing your $70k annual salary for the next 35 years, for a one-time payment of $250k. And I'm referring to a unique type of salary of $70k that is guaranteed and requires 0 hours of work. She sold it off for $250k because of a combination of a normal person's ignorance of finance and the fact she's mentally handicapped, too. It's an absolute disgrace and the fact her lawyer didn't have alarm bells going off is quite sad.
I'd have easily given her double and I'd still make hundreds of thousands of profit, without any real effort. Hell I could just resell the contract the next day to lines of investors willing to pay even more, including the company that ripped her off. That's how bad the deal was she got.
How many people understand their cell phone contract? The ToS for Facebook? Their work contract?
If we voided contracts that aren't understood well enough by both parties, we would fundamentally alter our society. (Though maybe that is a good thing in the long run.)
In particular, structured settlements are usually protected from bankruptcy, and usually are enough to keep the beneficiary off public assistance (so it transfers the cost from the taxpayer to whoever caused the harm). Allowing the payments to be sold off into a non-protected lump-sum at the discounted present value defeats the entire purpose of the lawsuit that generated the settlement.
Yes.
> Taken together, the sample shows Access Funding petitioned to buy roughly $6.9 million worth of future payments — which had a present value of $5.3 million — for around $1.7 million.
This is particularly true when you consider that the only real risk is the annuitant dying before you recoup the money you paid them and that most of the one-time payouts seem to be in the range of $16,000, while many of the monthly payouts seem to be around $1000/mo. Given those numbers, in two years (padding a bit for extra costs to close the deal) you've recouped your initial cost and the rest is just gravy until the annuitant dies.
Payday loans (which are also extremely exploitative, frankly) at least have the more likely risk of the borrower being unable to pay you back to justify the raw deal.
According to projections (http://www.census.gov/compendia/statab/2011/tables/11s0103.p...), a black woman who was 15 in 2007 would be expected to live to 63. So there is a significant risk that Rose would not live to the end of her payout period. But if the expected payout is >>18% of the present value of her payments (which it almost certainly is) then she got a bad deal.
Someone with time could use the annual mortality probabilities (http://www.ssa.gov/oact/STATS/table4c6.html) to calculate the expected payout. I'm bad at analysis so I'd probably use a Monte Carlo simulation.
People with lead poisoning probably live substantially shorter on average.
I don't think the risk of death is anywhere near significant enough for her to sign away half a million dollars in payments for $60k. She barely got more than 10 cents on the dollar in nominal amounts, and still less than 20c on the dollar in present dollar terms. I'd gladly pay double what she got and I'd still make a ton of money all things considered.
The number you were quoting (63) by the way is 'years of life remaining', not life expectancy as in 'age of death'. For example for a 100 year old the number is 2 years, which doesn't mean she'll live to 2 years old, obviously :)
Look just to give you a quick sense... The payments started at $1k but they go up. The average payment over 35 years is actually closer to $17k per year, and if you quadruple that (and the $60k or so she got in return) you get to amounts that make sense to many of us.
You get to a salary of $70k per year, a salary that is totally 100% guaranteed for 35 years (until death, and she's 20 years old so run the actuarial tables), and requires 0 hours of work.
Imagine you have that, $70k per year, guaranteed, can't be fired, and you put in 0 hours of work. It's independent of whether the market does well or not. And someone offers you $250k for you to forgo that for the rest of your life (well 35 years).
It's a total joke. You'd want at least upwards of $1m - $2m for it to come close to financially interesting. She got pennies on the dollar.
It's not 'value'. If you have $3k annual income for the next 50 years and I offer you $100k for it, it's not value, it's total bs. It becomes value ones the valuations are close. Plenty of investors will give you value, and if put on an open market, you'd get that value. But this happened due to predatory business, calling people who are mentally challenged and offering an awful rate. I'd have given her double and I'd still make a profit of more than half a million dollars, investors would line up to give her even more than that.
If she'd been given a market rate, then yes it'd be good value to an ordinary person who has this preference. Although the whole point is that she wasn't because she's a vulnerable person with no financial sense who's better off receiving $1k for the next 35 years, than receiving pennies on the dollar in a lumpsum $60k which lasts her for 5 years if she'd be frugal, and likely won't last because shitty friends/family will exploit a mentally damaged person who's known to have just received $60k.
Even for an ordinary person, this just makes no sense. After all, you can apply this type of discounting to any payment stream. Take your salary for example.
I mean let's scale the numbers to a salary that makes sense to some of you. The average payment the woman in the article was getting in those 35 years is about $1.4k or say $17k per year, and she's forgoing them for $63k.
Now let's quadruple those numbers to get to a salary some of you might get, about $70k per year, forgone for a one-time $250k. Imagine that $70k is your salary.
Now who here is willing to sell/forgo their GUARANTEED, 0 hours of work, $70k annual salary for the next 35 years, for $250k? Absolutely nobody, not a single soul.
There's no way you can call that 'value', until someone offers you a few million dollars at least. And if you had such a salary, guaranteed, without any hours of work, because someone poisoned you with lead and you're brain damaged... it's NOT okay for someone to convince you to forgo it for $250k over steak. That's predatory, unethical, harmful business. Especially when that person is DEPENDENT on that money. Yeah stealing $50 billion from Buffet is one thing, or even $1m from you or me. We can actually work and still live and thrive and enjoy life even if all our wealth is stolen. But she's brain damaged, can't work and can't live alone. She's the type of person that without $1k a month will end up homeless or on welfare or a combination of both, 20 years down the line.
Did you mean 3k monthly? Because if you meant annual, I'd take your offer.