Watchdog Warns Elderly of Bankruptcy Traders’ Offers

A government bankruptcy watchdog wants to ensure the claims trading industry doesn’t profit from the confusion of hundreds of people who have already lost money with New Life International, a Tennessee nonprofit that collapsed last year after investing money from charitable gift annuities.

In court papers, a Justice Department official said that some New Life annuity holders who are old and unfamiliar with the bankruptcy process have accidentally sold their claims at a steep discount to distressed debt traders, potentially foregoing thousands of dollars that might have come to them through the nonprofit’s repayment plan later this year.

New Life, based in Madison, Tenn., handled about 475 uninsured annuity investments, which enabled buyers to donate money to New Life charities and receive monthly or quarterly payments from that investment for the rest of their lives. Payments stopped flowing to annuity holders on Dec. 31 when the nonprofit filed for bankruptcy, blaming its struggling investment portfolio.

Several claims traders have mailed purchase offers to annuity holders with their usual pitch: sell us your claim at a discount and we’ll pay you cash now. But some New Life annuity holders said they thought they were signing official court documents when they were actually selling their claim for a payment worth 10 cents on the dollar, according to documents in U.S. Bankruptcy Court in Nashville, Tenn.

New Life lawyers said that annuity holders whose contracts were uninsured can expect to get 65% of their claim back later this year; once the nonprofit’s real estate properties are sold.

At least one annuity holder told New Life lawyers that he wanted to get out of his claims-trading contract but didn’t know how, according to court papers.

U.S. Trustee Samuel Crocker, whose office patrols the bankruptcy court for the Justice Department, said in court papers that the situation has created the “potential for revictimization of the annuitants who have already lost their retirement income stream.” Mr. Crocker urged the court to take extra steps to make sure that annuity holders “are not taken advantage of by claims traders who are praying on the annuitant’s age and vulnerable situation to entice, coerce or scare them into trading their claims.”

Meanwhile, New Life’s lawyers and representatives for New Life’s unsecured creditors committee are scrambling to caution annuity buyers, who live in 45 states, to watch what they sign.

Distressed claims buyer Liquidity Solutions Inc. bought at least 25 claims from New Life annuity holders and made offers to 10% to some of them, according to court papers.

Hain Capital Group offered a New Life annuity holder an “immediate cash payment” worth 28% of their claim, while ASM Capital offered 26%. Tannor Capital Management and Pioneer Funding Group both offered 25%, according to court papers.

“These purchasers would not be buying these claims unless they thought they were buying the claim for a profit,” warned attorney Bill L. Norton, who is monitoring New Life’s bankruptcy on behalf of unsecured creditors, in a letter that was recently sent to annuity holders.

Liquidity Solutions told New Life’s lawyers and creditor representatives to butt out of their business, stating in court papers that they “have no right to interfere with arms-length private commercial agreements between” annuity buyers and Liquidity Solutions.

New Life, which has about $3 million in cash, also invested money in a CD-replicating business. President Robby McGee, a Christian music singer, told the Christian Broadcasting Network during an interview that he records Christmas CDs.

Officials for New Life International, which was founded in 1979, blamed the nonprofit’s financial troubles on the real estate market crash, rising insurance costs and their struggle to “achieve its target return of 7% on its market investments due to historic declines in the stock market,” according to earlier court papers.

Charitable gift annuity issuers take into account a potential buyer’s age and their donation amount when they calculate what monthly and quarterly payments the buyer can expect to receive. The numbers are often calculated in a way that the charity gets half of the donation.

New Life’s reserve model “assumed a consistent earnings rate of 7% based on…mortality tables.” That’s much more optimistic than what’s recommended by the American Council on Gift Annuities, which recommends using an expected return on immediate gift annuity reserves of 4.25%, according to the trade group’s website.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech.