What to Do with Settlement Money from a Personal Injury Lawsuit
Finally getting your settlement check from a personal injury lawsuit can be a relieving—and overwhelming—experience. You may find yourself stressed under pressure to make every move in your best interest, especially if it is a large sum. Knowing what to expect when you finally reach a settlement and learning about all your options will help you confidently make important decisions with your money that act in your best interest.
Understanding Your Settlement
First, it’s important to actively educate yourself to fully understand the details of your settlement before you can responsibly start thinking about what to do with it. There are several factors to consider before beginning to plan how to use your new funds. Taking the time to look beyond the initial value of your settlement and into the way it is structured empowers you with the insight to manage your funds with minimal stress.
What Does a Settlement Check Look Like?
When you first reach a settlement, the court issues paperwork for both legal parties to complete within a certain time. This paperwork includes an outline of all the terms and conditions of your settlement, called the release. Your lawyer will review the release to ensure the terms are in your best interest before you agree to receive it.
Compensation from your settlement check will be awarded to you in the form of either a structured settlement, where monetary payments are provided in regular intervals over time, or as a lump sum, in which case you receive all your settlement money at once. Either way, your settlement funds will be sent directly to your attorney’s office before you can sign it.
Your Settlement Check and Your Lawyer
In most personal injury cases, a lawyer represents the client under a contingency fee agreement. This means your attorneys are only paid after a favorable trial outcome or once you reach a settlement. Your lawyer’s office will receive the full amount of the settlement from the insurance company, and will contribute the funds to those to whom it is owed.
Your lawyer will provide you with an itemized list of the deductions to be collected before sending you the remaining amount. At this time if you have any liens, or outstanding debts incurred during your case, your attorney cannot release your check until paying those debts from your settlement. Whether related to your case or not, the following may initially prevent your attorney from releasing your check:
- Outstanding child support balance
- Unpaid medical bills
- Requirement to reimburse your public healthcare provider
Once you know how much you’re paying towards legal fees and outstanding debt, it’s time to think about tax liability.
Potential Tax Liability
For the most part, settlement money awarded from personal injury compensation is not taxable in New York. Still, understanding the structure of your settlement is critical since certain awards, such as punitive damage, can create a liability. Punitive damages are paid over and above compensation as a punishment to the defendant, and are considered taxable income. Once you fully grasp the terms of your settlement, you can move forward knowing what you have to work with.
Talking About Your Settlement
Reaching a settlement can feel like an achievement and you may feel tempted to talk about it with others. Carefully consider who you keep informed. Keep information on a need-to-know basis, telling only your immediate family and the professionals you choose to consult with.
Following this advice will prevent unwanted attention and uncomfortable requests from friends and relatives.
Once news of your new financial gain gets out, you will be undoubtedly contacted by banks and private agencies. Banks and financial institutions are drawn to those who find themselves with more money than usual. It is common for banks to contact winners of personal injury settlements in an effort to convince them to spend their new funds on pricey financial services.
To make sure your finances aren’t taken advantage of, contact a lawyer, financial adviser, or accountant before making important decisions. Professionals are prepared to support the complicated decisions surrounding your settlement, especially if you’re still recovering from your injury. Emotional and physical recovery may affect your outlook during this big decision-making time. It helps to have someone specialized when managing the ways you choose to save and invest your funds.
Create a Plan for Your Settlement
Once you’ve set aside all the money you need for taxes and fees, you can start planning. Your plan should be based on your individual needs and what you want to achieve with your money. Organizing your goals and writing down a plan will keep you from spending your money too fast, or impulsively.
First, consider the length of time you will need your funds to last. Use the following ideas as guidance for yourself and directions for the professionals assisting in planning how best to use your settlement money.
Pay Down Debts
A large settlement check provides you with the opportunity to pay off debt. Plan to pay what you may owe from credit cards, high interest loans, or other bills. Using your funds in this way can help you earn financial freedom by reducing ongoing interest payments.
Create an Emergency Fund
After tackling your debt, it’s in your best interest to create an emergency fund. Try to set aside about six months of living expenses to prepare for sudden accidents, and offset the chance of being forced to incur debt in the future.
Pay for Education
If you have children, it may seem obvious to set aside money for their college funds. However, don’t overlook the opportunity to invest in your own education. Receiving a higher education may further support financial stability as a more valuable candidate in the job market. It is also an opportunity to achieve personal fulfillment by pursuing personal interests and passions.
Invest in Your Home
Consider investing in your home if you are able and don’t already own it. Paying off your mortgage will not only mean a reduced financial burden, but will also secure your home as an asset. Depending on your situation, your settlement money could be the opportunity for a sizable down payment on a new home, or an improvement on your current one.
Save for Retirement
Once you set aside for your emergency fund, consider setting aside for your retirement. Your financial adviser can help you decide what type of retirement fund is right for you based on your situation. Take advantage of this opportunity to save some capital for the years ahead when you’re no longer working.
Make or Update Your Will and Estate Plan
Regardless of financial status, you must consider how your assets will be passed on. Think about who you want to make financial decisions on your behalf if something happens to you. Use some of your funds to hire a will, estate and probate attorney to help you create a will and estate plan that ensures all your assets are accounted for.
Spending Your Settlement Responsibly
Your goal should be to tread carefully and not drain your funds with spontaneous or unusual purchases. With that being said, perhaps this is the opportunity to finally travel to a special destination, move to the place you’ve always dreamed of living in. Setting aside some of your settlement money for yourself is necessary and important.
Key Mistakes to Avoid with Your Settlement Funds
- Quick Decisions: Whether spending or investing, wait to make decisions until fully understanding all there is to know about your settlement.
- Bank Pitches: Expect highly motivated salespeople from your bank to immediately reach out with financial services and products from their own investment department. Don’t rush into any decisions before learning about all your options.
- Get-Rich-Quick Schemes: Like the bank, people will try to manipulate you and pitch ideas for risk-free opportunities. Whether telemarketers or people you know, they don’t always have your best interests in mind.
- Lending Too Much to Friends and Family: Giving to friends and loved ones can be a kind an generous thing to do. However, you should be wary of mixing finances with personal relationships. Consider the fact that these loans may go unpaid, and result in a uncomfortable situations where you aren’t guaranteed repayment.
- Neglecting Responsibilities: It’s easy to feel like you have a new life after receiving a large amount of money, but don’t forget what mattered most to you before you had it. Maintaining your day-to-day lifestyle prior to receiving your settlement will preserve a sense of normalcy, giving you the freedom to prioritize your values, and continue to make clear-headed decisions in your best interest.
Contact a Personal Injury Attorney in New York
Reach out Sobo & Sobo at 855-468-7626 for a free consultation with an experienced personal injury lawyer. Our attorneys are waiting to fight for you to receive the highest possible settlement you deserve.