What you need to know about settlements


If you’re contemplating filing a lawsuit with the goal of settling out of court, there are many things to keep in mind, including your attorney’s opinion. Trials are time-consuming, arduous and expensive.

Cost of Litigation
Many disputes are indeed settled outside of court to avoid the financial and emotional cost of a trial. Personal injury cases often have the highest settlement rates. When it comes to personal injury lawsuits, 9 out of 10 settle out of court. In fact, only five percent of personal injury lawsuits go to trial.

Those stats bode well for plaintiffs. However, it’s important to keep in mind that a  settlement shouldn’t be the goal. Covering your cost and future expenses and ensuring your wellbeing is ultimately the point of a personal injury lawsuit.

Settlement Amount
The promise of a large settlement could easily offset the uncertainty of a trial. Just remember, a settlement sometimes entails a compromise, which could mean the damages you receive may be less than what you initially sought.

Many parties pursue mediation to reach a reasonable solution to a dispute.

“Mediation gives people a quick, inexpensive way to work out their differences while addressing everyone’s needs and interests. Decisions reached in mediation are created by the people who are in conflict, not imposed on them by a judge,” according to the American Bar Association (ABA).

Proponents of the mediation point to these benefits, also listed on the ABA website:

  • encourages direct communication between the parties
  • helps people decide for themselves
  • allows for the expression of emotions
  • defuses anger
  • explores creative means of solving problems
  • promotes cooperation
  • preserves the strengths of an ongoing relationship
  • helps people accept the consequences of their own decisions
  • develops a model for resolution of future conflicts

Elements of a Settlement
A settlement is a contract where all the terms and conditions are expressly laid out. Here’s a look at what a typical settlement may include:

  • Names of the parties, addresses, dates, etc.
  • Reasons for the contract
  • “No admission of liability” clause, which clearly states that the settlement doesn’t include an admission of wrongdoing by either party
  • Payment section outlines the settlement amount that one party agrees to pay to the other party.
  • Payment section often includes invoicing, payment schedule, and even how the payment(s) will be made.
  • “Mutual release” clause, which states that both parties agree not to make any claims against the other party.
  • Signature line

Don’t Forget the IRS

Your settlements could be taxed. Here’s what it says on IRS.gov:

“The general rule of taxability for amounts received from settlement of lawsuits and other legal remedies is Internal Revenue Code (IRC) Section 61 that states all income is taxable from whatever source derived, unless exempted by another section of the code. IRC Section 104 provides an exclusion from taxable income with respect to lawsuits, settlements and awards.”

Some settlements are exempt from taxes, and to understand how your settlement is affected, check with your attorney and a qualified accountant.