Types of Settlements

Settlements resolve legal disagreements without the need for a trial. They are common in civil law and may involve the resolution of a contract dispute, personal injury claim or liability issue. They also pay for any damages a person suffers because of a dereliction of duty. In some cases, settlements cause more troubles than they solve. So it's important to know which types of settlements you may be entitled to and what you should do after receiving them.

Benefits

Settlements may be reached even before a lawsuit is filed. This makes them valuable negotiation tools between potential legal adversaries; at the same time, they save the money that consumers would have to spend in attorney fees for a complete trial.

Intent

A settlement is an agreement between a party that believes it has been wronged and the party allegedly at fault. For example, in the case of a personal injury lawsuit, a store may be sued if a consumer slipped and fell on a wet spill that was not properly wiped up. The store may choose to settle the lawsuit out of court, by agreeing to pay the injured party a sum of money for medical bills, pain and suffering, lost wages and potential future expenses.

Features

Settlements are almost always confidential. They are legally binding contracts on all parties to a legal action--whether it has been filed or not--and usually involve the payment of damages to the party that is the plaintiff. In return, the payer of the funds does not have to acknowledge any wrongdoing, and the plaintiff agrees not to discuss the terms of the settlement with the media or third parties. This greatly limits any damage to a person's or company's public image and reputation.

Types

There are usually two types of settlements: structured settlements and lump sum settlements. A structured settlement stipulates the payment of a predetermined sum of money, but it breaks up the settlement figure into individual payments. These might be monthly payments, yearly payments or payments made in different time intervals. Lump sum settlements require the payer to hand over the entire sum of the settlement amount in one payment.

Considerations

Both types of settlements have specific tax considerations. The Cornell University law school (a link is provided in the Resources section) maintains an online copy of U.S. Code Title 26, 5891--which explains that the payer of the settlement is not responsible for the withholding of any taxes. This places the burden of tax declaration on the recipient.

Problem/Solution

Settlements may become more of a burden than a blessing for the recipient, especially if the recipient fails to plan the use of the money. For example, if you are awarded a $100,000 settlement, your attorney most likely takes an immediate percentage off the top, diminishing your remaining funds. You are then liable for the state and federal taxes on the entire $100,000. This further reduces the money you have left. Unless you carefully budget the money, you may find that it will fail to meet your needs. Settlement planning services operate on a nonprofit basis to help settlement recipients make their funds last and meet their needs. A link to an overseeing body of this kind of business is listed in the Resources section.

Resources

• Learn about the taxation of settlements at Law.Cornell.Edu.
• The Society of Settlement Planners connects members with recipients at SSP.Members101.com.