How to Handle Lawsuit Settlements

Legal settlements are finalized in writing with signatures of all parties involved.

A lawsuit settlement may involve both monetary agreements as well as terms of behavior between parties involved in litigation. As a result, the specific handling of a lawsuit can vary from case to case. However, there are some components of a settlement that remain the same for the majority of such agreements, so understanding how to address them can be helpful. Keep in mind, anything you choose to do should be in consultation with your attorney who represented you in the matter.

Things You'll Need

• Copy of the settlement agreement
• Attorney
• A bank account
• IRS Form 1099 MISC
• IRS guidebook for tax returns
• Your state's tax return publication

Instructions

1. Obtain a copy of your draft settlement agreement in writing before agreeing to anything, either in writing or verbally. Review the document and your benefits or disadvantages to agreeing to the settlement with your attorney. Sign the settlement agreement if you and your attorney agree it gives you the best practical result to your litigation.

2. Have your attorney return the agreement for signature by the other party involved. Wait for your attorney to finalize the settlement agreement and for the court to approve it on the record, closing the litigation case involved.

3. Confirm with your attorney that all behavior requirements expected from the settlement have been performed consistent with the agreement. If the other party fails to perform specified tasks in a timely manner per the agreement, have your attorney call the party to ensure conformity with the agreement.

4. Open a new bank account if you do not have one already. Allow your attorney to manage receipt of any funds due to you from the settlement or any payments you need to make per the agreement. Wait for your attorney to receive the settlement payment if you are due one. Obtain from your attorney your settlement net amount after your attorney has deducted his or her services.

5. Deposit your net settlement payment into your bank account. Obtain from your attorney a copy of the full settlement payment paid to your attorney (you will need this for tax reporting). Obtain an IRS Form 1099 MISC from your attorney filled out with all the necessary details about the settlement.

6. Set aside enough of the settlement funds you received to address any taxes due to the federal government or your state government. Review the guideline publications from the Internal Revenue Service and your state regarding how to report the settlement on your tax returns. Pay any taxes due on your settlement.

Tips & Warnings

• Most parties in a settlement want to get the issue resolved and closed as soon as possible. While the issue may have been frustrating, working to meet the terms of a settlement agreement closes the requirements faster. Avoid emotional responses and stick to the terms of the agreement so as not to reopen old wounds.

• Not all settlements are taxable. Those that involve repair of physical harm generally don't get taxed. Settlement payments tend to be taxable if they provide additional income or pay for punitive damages or non-physical recovery. Consult your tax consultant and IRS publications on the specifics of your given case and how to address related taxes.

References

• Law Firms: Finalizing and Accepting a Settlement
• Glen Crick - Attorney at Law: Deciding Whether to Accept a Settlement Offer
• MSN Money; "Win in Court Without Losing to the IRS"; Jeff Schnepper.
• U.S. Internal Revenue Service: :Pamphlet 4345 - Settlements Taxability