My grandfather has been providing post judgement loans to people for 9 months through his friend who has connections to a lay firm. So once someone received a judgment saying that “x” company owes them $500,000 he loans them 80k for a three month period with 100k paid out to him once the person during gets their claim.

Is this a scam? Ever heard anything like it?

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    Can you offer more specifics about the relationship between your grandfather and his “friend“? How do they know each other? Is the friend in actual practicing attorney that he knows in real life? These details are key – JTP - Apologise to Monica Apr 11 '19 at 10:34
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    Your grandfather has been doing this for 9 months already. How many loans has he paid out? How many of them have shown returns? Note that showing the returns doesn't necessarily mean it's legit - it might be part of a longer con or ponzi scheme. I agree that more details would help, although as a knee-jerk reaction, it seems weird that anyone would rely on a private individual rather than a bank to supply loan money. – Steve-O Apr 11 '19 at 13:35
  • By "lay firm" do you mean "lawyer firm"? – DJClayworth Apr 11 '19 at 14:48
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    Sounds like a decent business. Someone may have a judgement that is going to pay them money when it's settled, but they need money now, so they borrow it. A lawyer would know about the judgement and may be able to arrange for some of the settlement to go to your grandfather to pay off the loan, making it very secure. – DJClayworth Apr 11 '19 at 14:51

No, it's not a scam. A scam is where someone takes something from you in return for a promise of something else, but never intends to deliver. Here, the terms are disclosed - you know exactly what you're getting into.

This is more akin to a pay-day lender. He is providing short-term loans with a very high rate of return (likely to compensate for the enormous credit risk).

  • Feels like this is splitting hairs between fraud/scam, many people at the beginning of ponzi schemes get fantastic returns on their investments, that's what grows/perpetuates the fraud. – Hart CO Apr 11 '19 at 15:50
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    If this is a scam just because the APR is 100% then literally all payday lenders in the US are scams. I had to pay about 365% (20% for 20 days) for a payday loan. – xyious Apr 11 '19 at 19:12
  • @xyious Varies by state for sure, in some states that'd be criminal usury. – Hart CO Apr 11 '19 at 19:29
  • The difference between this an a Ponzi scheme is that here EVERYONE is getting what they expect. – DJClayworth Apr 11 '19 at 20:21
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    @DJClayworth That's one assumption. OP says he's making loans "through a friend" so I didn't assume he's actually making loans to the individuals personally. The "friend" could be running a ponzi scheme. If he's making these loans personally then I agree with you, if he's just writing checks to this friend for these loans then it could very well be a scam. – Hart CO Apr 11 '19 at 21:01

25% ROI in 3 months is incredible. If each quarter he made an $80k loan he would double his money in a year. He's basically lending money at 100% annual interest rate. If it's not a scam/fraud then I would imagine there must be substantial risk that the settlements will not be paid out.

Reputable companies that buy structured settlements typically have a discount rate of ~10-12%. These companies are doing basically what your grandfather is doing but they are getting repaid over the course of years rather than in 3 months, and they are charging significantly less.

Without knowing more detail nobody could say with certainty whether or not there is fraud involved. Specifically, if he were just writing checks to this friend and getting money back, it could very well be a ponzi scheme. If he's actually dealing with the individuals directly then it's not likely a scam. If it's legitimate the rate being charged seems like it might run afoul of usury/predatory lending laws, but those vary wildly by state.

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    If the loan is only repayable once the claimant gets paid by the defendant, then there is a very high risk that the loan will never get repaid. The interest charged needs to take that into account. – Simon B Apr 11 '19 at 20:09

Even if we assume that it is legit, it is still a very risky business proposal.

once someone received a judgment saying that “x” company owes them $500,000

There are a lot of things which can happen now.

  • The company might go bankrupt and unable to pay the settlement.
  • It might not actually be the final judgment. The company might file an appeal. The actual final judgment might be completely different.
  • The company might file a counter-claim suing "someone" back and get back part of the money (or even turn it around and get more from them)
  • "Somoene" might not be credit-worthy. Maybe "Someone" has a couple outstanding debts themselves. The 580k they now have all get sucked up by other creditors. Or they just spend it. And then they won't be able to pay back the $100k in 3 months. Or "Someone" just disappears without a trace after they got their money.

If any of this happen, your grandfather will be out of his money. In order to mitigate that risk, your grandfather would have to do some research in each particular case. He would need to know a lot about businesses to estimate if the company is able to survive the lawsuit, he would have to know a lot about law to understand the court documents, what they actually say and if what they say is final and he would have to do some research on the debtor.

But if the case would really be risk-free, then the person could just as well get a loan from a bank for a much lower interest rate. Why don't they do that and instead pay your grandfather a huge 25% interest for a 3 month loan? That's a loan-shark level interest rate. Nobody would sign such a credit contract unless they are desperate (or don't intend to pay it back). Likely they already tried to go to a bank, the bank looked at the whole situation and then decided "Hell no, that's a totally crazy risk for us. Forget it!"

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