What to Do With Money from a Lawsuit Settlement

There are two types of lawsuit settlement: lump sum and structured settlement. In a lump sum settlement, you receive all of the award money in one payment. In a structured settlement, you receive regular payments over an agreed period of time. What you do with the settlement money may depend on which type of settlement you receive, the total amount of the settlement and your personal circumstances.

If you have a lawsuit settlement due to a personal injury, you may have medical bills to pay as well as living expenses from not being able to work. Even if your insurance company has paid for your treatment, some insurance companies have terms in their policies that require the insurance company to be reimbursed if there is a settlement. This money would be deducted from the total settlement amount. Check with your insurance company to determine whether they will take any share of the settlement money.

Following a settlement, you will also need to pay attorney's fees. If your attorney has worked on a contingency or no-win no-fee basis, they will usually take their fee directly out of the settlement money. For all attorneys, the method of payment will be agreed upon during the hiring process and should be clearly stated in the retainer agreement. Attorneys who work in exchange for a percentage of the settlement amount may calculate their fee based on the gross settlement amount (the amount before medical bills are paid) or on the net amount (the amount after medical bills are paid).

When you receive a lawsuit settlement, keep in mind that you may have to pay taxes on the money as if it were income. Internal Revenue Service (IRS) Tax Code section 61 states that any income you receive is taxable, unless it is excluded by the IRS. Section 104(a)(2) specifically excludes income from lawsuit settlements for personal injury or illness. There are, however, a number of exceptions to this. Whether you will have to pay tax on your settlement income or not can be a complicated issue, so it may be best to consult a tax lawyer before spending your settlement money.

If you have received a structured settlement, you will be receiving regular payments over a period of time. However, if you would prefer to have the money as a single lump sum, you can sell your structured settlement. There are a large number of financial services companies that specialize in buying structured settlements. In exchange for the rights to collect all of the settlement money, these companies will pay you a lump sum. The amount you receive will depend on the calculated value of the future payments and the company's fee – often a percentage of the total. You should be aware that many states have laws that restrict the sale of structured settlements and this may require a judge's approval.

If you receive your lawsuit settlement money as a lump sum, you may want to consider investing the money in a long-term investment, such as mutual funds, that will provide you with income. This is particularly important if you have been disabled by an injury or illness. You should consult with a certified financial consultant to determine the type of investment that will best meet your long-term needs.