It can be a relief, but also overwhelming, to finally get a settlement check from a personal injury case. You will want to make the best decisions, especially if you are receiving a large sum of money. To make more informed decisions in your best interest, you will need to know what to expect after a settlement has been reached and learn about your options.
About Personal Injury Settlements
Before you figure out what you should do with your settlement, you need to understand its details and actively educate yourself. Several factors should be taken into consideration before you start using the funds. If you take the time to look beyond your settlement’s initial value and into how it’s structured, you will have the insight to manage the money without any worries.
What a Settlement Check Looks Like
You and the defendant will receive paperwork from the court that will need to be completed within a specific time frame after a settlement has been reached. The paperwork will include an outline of the conditions and terms of your settlement. This is known as a release. Your attorney will review the paperwork to ensure that the terms are favorable before you elect to receive it.
The compensation you receive from your settlement check will be given to you either as a lump sum or as a structured settlement where payments are provided to you in regular intervals over a period of time. Either way, the funds will directly be sent to your lawyer’s office before you sign off on them.
Settlement Checks and Your Attorney
An attorney has a contingency fee agreement with a plaintiff in most personal injury cases, which means they are paid if the trial reaches a favorable conclusion or after a settlement has been reached. Your attorney will receive the full settlement amount directly from the insurance company. The funds will then be distributed to the person who is owed the money.
Before your attorney sends you the remaining amount of your settlement, they will give you an itemized list of the deductions taken out of the check. If you have any outstanding debts or liens incurred during the case, these debts will be deducted from your settlement before the attorney gives you the rest of the money.
The following instances may prevent your attorney from issuing you your check, whether they relate to your case or not:
- Reimbursements to your healthcare provider
- Unpaid medical bills
- Outstanding child support owed
Once you know how much money you may owe as it pertains to outstanding debt and legal fees, you will need to think about tax liabilities next.
Possible Tax Liability
Settlement money that is awarded to a plaintiff from a personal injury case is not taxable in general. However, it is still important for you to understand how your settlement is structured because certain awards like punitive damages can be considered a liability. Punitive damages serve as a punishment for the defendant and are paid above and over your compensation, making them taxable. Once you fully understand the terms of your settlement and what you have to work with, you will be able to move forward confidently.
Hiring a Financial Advisor to Help You Plan
You can begin making plans on how the funds will be spent after setting some money aside to cover your fees and taxes. You will want to base your plan on your individual needs and what you hope to achieve with your compensation. You should organize your goals and write out a plan so you won’t spend the money impulsively or too fast.
First, you will need to consider how long you will need the money to last. The following paragraphs include some guidance you can follow, along with directions for professionals who are assisting you with your settlement money and how it should be spent.
Pay Off Debts
If your settlement check is large enough, you may be able to pay off all of your existing debt, including high-interest loans, credit cards, or other expenses. By reducing your interest payments, you will be able to achieve financial freedom.
Emergency Fund
Once you have paid down your debt, you should create an emergency fund with some of the money. To offset the chance of incurring debt in the future and prepare for any sudden accidents, you should set at least six months of living expenses aside.
Education Expenses
You may want to set aside money for your child’s college funds if you have any children, but you can also invest in your own education as well. A college degree can help you achieve higher financial stability and make you more valuable in the job market. You can also pursue personal passions and interests.
Investing in Your Home
If you don’t already own your home, you may want to consider investing in it if you can do so. Your financial burdens will be substantially reduced after your mortgage is paid off, and it will also make your home a valuable investment. You could use some of your settlement money for a down payment on a new house or improve your current one, depending on your situation.
Retirement Savings
Once you have set enough money aside in your emergency fund, you should consider setting aside some additional funds for your retirement. A financial advisor can offer you some retirement fund options that may work for you, based on your current situation. This is an excellent opportunity for you to save some money for the future when you are no longer working.
Make/Update Your Estate Plan and Will
You will need to consider how all of your assets will be passed on, regardless of your financial status. You should think about designating a person who can make financial decisions for you on your behalf if something happens to you. You should hire a probate, will, and estate attorney to help you create an estate plan that will ensure that all of your assets will be accounted for.
Financial Mistakes to Avoid
While you must tread carefully and not throw your money away on unusual or spontaneous purchases, it would not hurt to set aside some settlement money for a trip to a special destination you have always wanted to visit.
The following mistakes should be avoided with your settlement funds:
Rushed Decisions: Whether you are investing or spending, make sure that you understand everything about your settlement before making any hasty decisions.
Bank Investments: Highly motivated salespeople at a bank will attempt to reach out to you with financial products or services from their investment department. You should learn about your options before you rush into any decisions.
Get Rich Schemes: Similar to banks, there are other people, such as telemarketers, who will attempt to manipulate you or pitch ideas for get-rich schemes. In most cases, these people do not have your best interests in mind.
Lending Your Family and Friends Too Much Money: It can be generous and kind to give money to loved ones and friends, but you should not mix too much of your finances with personal relationships. Many of these loans will likely go unpaid, and you may be placed in a difficult situation where repayment may not be guaranteed.
Neglecting Day-To-Day Responsibilities: You may feel like you’re living large after you have cashed in your settlement check, but you must remember the things that mattered to you before you had the money. In order to preserve a sense of normalcy, you should maintain a day-to-day lifestyle prior to receiving your settlement check so you will be able to prioritize what’s important to you and make level-headed decisions in your best interests.
