Civil Lawsuit Settlements: What You Need to Know
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At some point, and most likely at several points, you will need to consider accepting a settlement offer. Your attorney should be discussing the possible value of your case throughout, and may have recommended a settlement amount. This is, however, ultimately your decision.
How Much is Your Case Worth?The answer to this question depends on two things: the damages you would likely recover if you win your lawsuit in court, and the likelihood that you will win and recover those damages.
The first part- what you can expect if you win your case at trial- should be something your lawyer can estimate for you. This will depend on the nature of your claims and the extent of the compensable damages you have suffered. The second part- your chances of success- is really at the center of most settlement negotiations. Some legal claims are very real but hard to prove. The other side might have evidence that is damaging to your case. You may have claims that rely entirely on your word against someone else's (a "he said she said" situation). Your attorney will have an opinion on this. The other side's attorney will also. Almost certainly your lawyer will assign a higher chance of success than the other side's lawyer. Whatever those numbers are, here is a simple way of looking at the value of your claims. Assume your damages are $100,000. Your lawyer believes you have a 65% chance of winning and recovering those damages. The other side's lawyer believes in their defenses, and that your chances of success are more like 25%. In most cases, the settlement value based on those numbers is somewhere between $25,000 and $65,000. |
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Civil Settlements: Taxes and Attorneys' Fees
When you are considering a settlement offer, it is important to be clear about how much of that settlement payment you get to keep. There are legitimate offsets to a settlement amount for taxes, out of pocket costs incurred, and attorneys' fees. You do not want to be taken by surprise by any of these after accepting a settlement amount.
Is the Settlement Taxable? |
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In most civil cases, the settlement payment will be taxable as income. In employment cases, the amount of the settlement attributed to lost wages will be processed through payroll. This means that the employer will withhold state and federal income taxes, just as they would on a regular paycheck.
Other amounts may be attributed to things other than lost wages- for example emotional distress or business damages. These will not be subject to withholding, but you will get a Form 1099 the following year. Especially if the amounts are large, you should talk to a tax advisor to determine whether or how you will be taxed on these amounts. You should know, though, that with limited exceptions, most or all of the income you receive in settlement of a civil case will be taxable in one way or another. To put the tax issue in perspective, remember that if you are seeking lost wages you are recovering for amounts that would have been taxed if you had not been terminated or pushed out of the job in the first place. If you are seeking to recover for damages to your business, that income that you are replacing would also have been taxable income. This is not something that either your lawyer or the other side can control, but important for you to understand when considering a settlement. |
Attorneys Fees |
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If you are paying your attorney by the hour, you will already know how much expense you have incurred, and can factor that into your calculations. If you are on a contingent fee basis, you will need to subtract that amount or percentage from the total settlement offer. In many cases- discrimination and harassment or wage and hour matters, for example- if you win the other side will have to pay your fees. Generally a settlement offer is a lump sum that does not separate between damages and fees, but this can be an important negotiating tool for your lawyer.
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Your Net Settlement Amount: The Bottom Line |
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Taxes, attorneys fees and out of pocket costs should all be considered in evaluating the total settlement amount presented. Using the prior example, assume the settlement value is $50,000. If you are on a contingent fee engagement at 33%, $16,500 of that will go to your attorneys, leaving a net of $33,500. Assuming a 30% withholding rate, the net check to you would be $23,450.
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Why Accept a Settlement?
Over 97% of civil cases settle before going to trial. There are many reasons for this, including that the outcome at a trial is always unpredictable. That means that though you have a chance at recovering more than the settlement amount, you also have a chance of recovering nothing, or a lower amount of damages than you expected.
Another reason most people choose to accept a settlement over going to trial is time. It takes time to participate in discovery and prepare for trial, time which you might rather spend doing something else. It also can take a long time to get to a judgment, especially post-pandemic when the courts are still backed up.
Finally, at some point most people just want to put the issue behind them. If you are suing someone, it usually is because something bad and painful happened to you. Most of our clients find it much easier to move forward once they have reached and finalized a settlement with the other side.
Another reason most people choose to accept a settlement over going to trial is time. It takes time to participate in discovery and prepare for trial, time which you might rather spend doing something else. It also can take a long time to get to a judgment, especially post-pandemic when the courts are still backed up.
Finally, at some point most people just want to put the issue behind them. If you are suing someone, it usually is because something bad and painful happened to you. Most of our clients find it much easier to move forward once they have reached and finalized a settlement with the other side.
How We Can Help
If you are unsure whether you should accept a settlement offer, or simply need help understanding your claims and what they might be worth, we can help. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
