by John Darer® CLU ChFC MSSC RSP CLTC
The City of Stockton, CA is filing for bankruptcy protection under Chapter 9 of the U. S. bankruptcy code. Stockton is the largest city (300,000 residents) to ever seek Chapter 9 protection. The city has been pummeled by falling real estate values and soaring pension costs.
Pension costs are expected to increase about 94% over the next ten years. According to various major news outlets, such a sthe Los Angeles Times, the Stockton City Council halted bond payments, slashed employee benefits and adopted an emergency budget in the wake of the failure of mediation talks with creditors. California Law AB 506, requires such mediation prior to a municipality being able to file for debt reorganizaton.
Median home prices in Stockton have fallen from $407,000 in 2005 to just $118,000 in February 2012. That's a -16.29% annual return over the 7 years!
The Stockton situation illustrates how placing a substantial percentage of your settlement into a home is not always a good idea. Setting aside the cost of maintaining the home and taxes, let's look at what might have happened to a Stockton, California plaintiff who bought a home at the median price.
Case Example $1,000,000 net settlement February 14, 2005. Plaintiff unable to work
Had a plaintiff purchased a home with all cash in February 2005, they could be looking at almost a $300,000 loss. It could be worse if a substantial portion was borrowed and there is an "underwater" mortgage.
- A 7 year Treasury Bond averaged 3.97% for the month of February 2005
- A 10 year Treasury Bond averaged 4.22% for the month of February 2005
Source: Federal Reserve H15
A lump sum of $407,000 invested at 4% for 10 years would equal in excess of $535,000. Structured settlement rates generally tracked Treasury rates in 2005 and if the structure is for payment of damages for personal physical injury or physical sickness the payments are income tax free.
When thinking about your personal injury or wrongful death settlement proceeds, be sure to think about the alternatives.