How are personal injury settlements paid out?

After you reach a settlement you'll want to know how personal injury settlements are paid out. There are five main steps you'll need to go through from signing the release to figuring out the tax implications of your settlement. At the federal level, pain and suffering payments are not taxed but any lost wages included in the settlement could be subject to income taxes. States vary on how they tax settlements, so be sure to discuss these matters before accepting any settlement offer.

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Maurice Davis is a personal injury attorney and the founder of Davis Injury Lawyers, PLLC in Detroit, Michigan. He combines his compassion with his years of legal experience to help people hurt by another party's negligence get the justice they deserve - a mission that drives him, and his team. With a degree in political science from Michigan State University and a J.D. from Florida State Unive...

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UPDATED: Feb 28, 2022

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  • Reaching a settlement is the first major hurdle to overcome
  • You may have outstanding legal, medical, or repair bills to pay with your settlement
  • Depending on which state you live in, you may owe taxes on some or all of your settlement amount

You’ve won your personal injury case. Now, it’s time for the insurance company (either the defendant’s insurance company or your own) to pay you the compensation you deserve. 

Before you receive a payout, there are five steps for you and your attorney to complete. 

Step 1 — Sign the Release Form to Receive Payment 

Before issuing a personal injury settlement, you must sign the insurance company’s release form and probably a few other documents. 

Always read legal documents in their entirety before you sign. If you don’t understand the terms and conditions of the settlement release form, ask an attorney for help.

Although the release form will be specific for your claim, most contain similar legal demands, including:

  1. You agree not to pursue additional compensation from the insurance company or the at-fault party. 
  2. You agree not to take legal action against the at-fault company or the insurance company for the accident or injury. 
  3. You understand that receiving a settlement is contingent on signing and accepting all terms in the release form. 

Some release forms contain a confidentiality clause about the details, parties, or settlement amount. 

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Step 2 — Pay Overdue or Deferred Accident-Related Expenses

If you worked with an attorney, the insurance company would make the check payable to both you and the law firm. Your attorney deposits the check into the legal trust account. At this stage, you are close to receiving your portion of the settlement, but first, you must repay (or pay) any debts or creditors. 

Overdue Bills and Liens

Even if you have health insurance to cover your car accident injuries, you must pay the deductible. There could be other expenses, such as medical services from a physician or facility outside your network. 

It is common for a third party, such as a healthcare provider, to put a lien on an insurance settlement. An attorney can negotiate with the third party to reduce what you owe them (for example, removing late fees or interest payments). 

Who You Might Owe

You might have asked your doctor or the hospital to delay billing until you had funds from a settlement. You could owe one or more providers or entities, including the following: 

  • Healthcare Providers. Deductibles, out-of-network costs, and healthcare services that exceed your policy limits
  • Government Health Insurance Programs. Reimbursement to Medicaid or Medicare if they paid for accident-related injuries 
  • Group Health Insurance Carriers. Some private health insurance companies request reimbursement 

Legal Fees

Personal injury lawyers usually work on a contingency fee basis. They are paid contingent upon winning compensation for their clients. This payment is a percentage of the total settlement. 

Step 3 — Determine What Type of Payment You’ll Receive 

You can receive your settlement in two ways. Either a lump settlement or a structured settlement.

Lump Sum Settlement

This is an informal name for a personal injury settlement paid out with a single large amount. Typically, you receive a direct deposit or ACH (paper check) after paying related debts and liens. 

Structured Settlement

Structured settlements equal the total amount awarded, but over a schedule of weeks, months, or years. A structured payout is usually for larger settlements. In this case, you, your attorney, and the insurance company must agree on the terms and conditions in a structured settlement, including:

  1. Amount of your first payment
  2. Amount of subsequent payments
  3. Method of delivery (i.e., direct deposit)
  4. Ability to increase the amount or frequency of payments

Step 4 — Finalize Your Case And Receiving Payment

You and your attorney will probably meet to finalize your case since there might be remaining documents to sign. After your case documents are completed plus all expenses and legal fees are paid, you receive a settlement payment via check or direct deposit. 

How long does it take to receive a settlement?

Each claim is different, but on average, most individuals receive their settlement in about six to eight weeks. 

You can help speed up the process when you:

  1. Talk to a personal injury lawyer as soon as possible after the accident or injury. The sooner you call, the faster they can help you with your claim.
  2. Keep all receipts and bills. 
  3. Submit documents with your claim. The insurance company needs to see proof of injuries and damages before considering a settlement. 
  4. Make sure everything on your claim is complete and accurate. 
  5. Let your attorney talk to the insurance adjuster on your behalf. Having a single point of contact reduces the possibility of error or miscommunication. 

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Step 5 — Understanding Your Tax Obligations, If Applicable

Generally, you do not owe federal income tax when compensated for pain and suffering. You probably won’t have to pay taxes on money for car repairs. However, money received for lost income could be subject to taxes. You could also owe state income taxes on your settlement, depending on where you live. 

It is in your best interest to meet with a tax professional to answer your specific questions and concerns.

Do you have questions about an insurance settlement?

An insurance settlement provides financial relief when you’re injured, unable to work, or have medical expenses. 

However, insurance companies won’t pay without proof that their policyholder caused or contributed to your injuries and damages. It takes a skilled car accident attorney to guide you through gathering evidence, submitting a detailed claim, and negotiating maximum compensation.

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