That's a Whole Lot of Zeros

We all heard this jingle.  "You have a structured settlement but you need cash now.  Call J.G. Wentworth, 877-CASH-NOW!"  I'm not knocking Wentworth's business model (There's other companies out there that do the same thing, like Peachtree.) but you have to wonder.  What kind of person would need their services in the first place.

Before we get to why you would want to sell a structured settlement let's explain a little bit about what Wentworth does and what goes on before you even see your money.  Let's say you won a lawsuit.  Instead of giving you your $500,000 up front, the judge agrees to the defendant's request to pay you over 20 years.  Remember only you get your cut over the next 20 years.  Your attorney is paid his third up front.  The doctors and the hospital are paid their medical bills up front too.  So at this point, you owe neither the medical bills from your injury nor the attorney's fees.  You also won't be seeing the whole $500,000, but will rather get what's left over after attorney and medical expenses, let's say that's $250,000, on which you will earn interest while it is being paid off.  Your portion of the settlement comes out to $1,700 per month.

By the time the settlement was awarded, about four years have passed since you filed your lawsuit.  Since you waited almost two years to file after you fell down the steps at Waterfront Stadium when you went to see the Trenton Thunder play (your attorney wanted to wait the two year limit to see the extent of your medicals before filing), it has now been almost six years since you broke your back.  You have since recovered from your injuries and found a job, so the $1,700 per month is just extra gravy, you don't have to live off it.

So your choices now are collecting $1,700 per month for 20 years (not a bad payout, since even if you can't work, you can still collect Social Security Disability on top of the settlement), or you can sell your settlement to a third party like Wentworth.  Since structured settlement companies are in the business to make money, they are not going to pay you the whole $250,000.  I never done business with one, so I don't know what cut they take, but my guess is it is probably fairly hefty.  Let's suppose they are willing to give you $175,000 up front.  That means you loose $75,000 off the principal, plus the interest you would have gotten off the principal over the 20 years.

Still want the product?  Probably that depends on how bad you "need cash now".  Remember you either got your regular job (if you can work) or are drawing about $1,500 a month for life (with annual cost of living raises) from Social Security.  So even if you are out of work, you won't be destitute if you take the settlement, because between the lawsuit money and the settlement, you will be earning $3,200 a month, which is enough to support a modest lifestyle for a retiree.  But if you take the $175,000, your income drops to $1,500 a month, which is cat food territory (I guess you'd be needing a new cook book.).

So what gives?  Perhaps your wife works and you still work too (the whole lawsuit is gravy).  You want to buy a house.  Then getting $175,000 up front may help.  Same thing if you are single, crippled and on Social Security, but have a business that you could open with the $175,000.  Providing you are successful and can earn more than the $1,700 per month, you come out ahead.

Like they say on the edgy series of anti-smoking commercials, "Really?".  Starting a successful business or buying a home would be good uses for $175,000, but is that what structured settlement customers really do with the money most of the time?  Not hardly.  I bet, most of them are up to their eyeballs in debt and will do anything to get out.  So they sell a source of income for a steep discount to get an immediate cash fix.

Sound familiar?  Think about the state's finances.  New Jersey is in deep doo doo.  We are running a massive deficit, but the public still expects the criminals to be kept off their backs, the fires put out and the potholes filled on the roads.  They also like it when the politicians come up with new ways to spend money like more grants and loans to attract businesses to the state (Christie's idea) or offering full-time kindergarten and preschool to more kids (Corzine's idea). 

So what's a poor state with lots of expenses and too little revenue to pay for them to do?  Enter revenue anticipation bonds.  They're kind of like J.G. Wentworth for governments.  What New Jersey and some other states do is sell bonds and pledge revenues from a sources like the tobacco settlement or insurance surcharges billed to drivers with points on their licenses to get money up front.  They then use the revenues to pay back the bonds.  Of course, New Jersey does not get nearly as much from revenue anticipation bonds as it could get from sitting back and waiting for the money to come in from the various taxes and fees it collects.  But in the end the state is just another credit junkie.  It will sell its lifeblood for a steep discount to get Shylock off its back for a few months.

So next time when the papers blame public employee wages (about $55,000 per year average) and benefits for the state's financial problems, just remember the real cause of the problem.  I don't expect you to take my word for it.  Check out this bond placement attorney's resume to see all the New Jersey revenue anticipation bonds he has handled. 

Check out the dollar amounts.  That's a whole lot of zeros.  Imagine the money the state would have really gotten if it didn't do the equivalent of you selling your paycheck for the next 20 years to Wentworth for a lump sum?  Here is the link: www.ostowlaw.com/mjo_transactions.html