How to Handle Lawsuit Settlements

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Settling a lawsuit rather than going to trial can you costly legal fees and ensure that you get paid for all or a portion of your damages. While lawsuit winnings can feel like a huge windfall, you'll need to set enough money aside to cover the damages caused by the breach that gave rise to the lawsuit. You'll also need to find a way to carefully manage your funds so that they don't go to waste.

Review the settlement agreement with the assistance of your attorney. Settlements are contracts, which means they're legally binding, and you could be held in contempt of court if you break an agreement contained in the settlement. Once you settle your lawsuit, you won't be able to re-file it -- so don't agree to any terms with which you are uncomfortable or that seem unfair.

Submit your settlement agreement to the court. The judge will review the settlement, approve it and then issue an order that gives the settlement the full force of law. Until the settlement is submitted to the court and approved by the judge, you and the other party can make modifications to it.

Pay your lawyer. Depending upon the state in which you live and the contract between you and your attorney, your settlement check could be made out to your attorney, who will take out his cut and then disburse the remainder to you. Make sure you budget for this reduction in your earnings. However, if the funds are sent directly to you, you'll have to give your attorney the amount you agreed to when he took on the case. Otherwise, he could sue you and you'll find yourself embroiled in another legal fight.

Pay for any damages that the settlement was intended to cover. You're not under any legal obligation to do so, but if you've accumulated medical debt or had to dip into your savings, pay this money before you do anything else with your settlement funds. After that, meet with a financial adviser who can help you determine what to do with the funds. You might want to invest them, use them to start a business or establish a charity.

Pay taxes on your settlement. Settlement funds that go directly to pay for physical damages or illness aren't taxable, but punitive and compensatory damages are taxed. If you're given money to compensate you for lost wages, for example, you'll pay taxes on this money as if it had been part of your salary.


  • Don't start spending money from your settlement until you receive it; it's always a possibility that the other party could go bankrupt or try to avoid payment.