When a personal injury case settles, the money does not arrive as a single check deposited into your bank account the next day. The settlement funds pass through several hands, deductions are taken, and the net amount you receive may be substantially different from the gross settlement number. Understanding the payout process — how the money moves, what comes out of it, and when you actually receive your share — prevents the settlement from feeling like a disappointment when the check arrives.
The settlement process from agreement to payment
After the parties agree on a settlement amount, the insurance company prepares a release — a legal document in which you agree to give up your right to pursue any further claims arising from the accident in exchange for the payment. Once you sign the release, the insurance company issues a settlement check. This check is made payable to you and your attorney jointly and is deposited into the attorney’s escrow account.
The timeline from signed release to payment varies. Some carriers issue the check within two to four weeks. Others take longer. If the settlement involves a minor or an incapacitated person, court approval is required, which adds time. If Medicare has an interest in the case, the settlement may be delayed until Medicare’s conditional payments are resolved.
What comes out of the settlement before you are paid
The gross settlement amount is not what you take home. Several deductions are made from the settlement before the net proceeds are distributed to you.
Attorney’s fees are the first deduction. In New York personal injury cases, attorneys work on a contingency fee basis — typically one-third of the settlement amount. If the case required filing a lawsuit and proceeding to trial preparation, the percentage may be higher. The fee is calculated on the gross settlement.
Litigation costs are deducted separately from the attorney’s fee. These include filing fees, expert witness fees, medical record retrieval costs, deposition costs, and any other out-of-pocket expenses incurred in pursuing the case. These costs are typically advanced by the attorney and reimbursed from the settlement.
Medical liens must be satisfied. If health insurance, Medicaid, Medicare, or a workers’ compensation carrier paid for treatment related to the injury, those entities have a right to be reimbursed from the settlement. The lien amounts are negotiated and paid from the settlement before the remaining funds are distributed to you. Lien negotiation can significantly affect your net recovery — reducing a $30,000 lien to $15,000 puts an additional $15,000 in your pocket.
Lump sum versus structured settlement
Most personal injury settlements are paid as a lump sum — one payment of the full net amount after deductions. A structured settlement, by contrast, pays the settlement over time through a series of periodic payments funded by an annuity purchased by the defendant’s insurance company.
Structured settlements can be beneficial in cases involving catastrophic injuries where the plaintiff needs income over a long period, or in cases involving minors where the court wants to protect the funds until the child reaches adulthood. The payments from a structured settlement are tax-free, just as lump-sum personal injury settlements are. The trade-off is that once a structured settlement is established, the payment schedule is generally fixed — you cannot access the full amount if you need it.
Tax treatment of personal injury settlements
Compensatory damages for physical injuries in a personal injury settlement are not taxable under federal or New York State income tax. This includes the portions allocated to pain and suffering, medical expenses, and lost wages attributable to the physical injury. Punitive damages, if any, are taxable. Interest earned on the settlement after it is received is taxable. If a portion of the settlement is allocated to emotional distress that is not connected to a physical injury, that portion may be taxable.
How the settlement is structured and allocated in the release agreement can affect the tax treatment. This is a consideration your attorney should address before the release is signed, not after the check arrives.
How Schwartzapfel Holbrook handles the settlement process
At Schwartzapfel Holbrook, we walk every client through the settlement payout before they sign the release. That means showing you the gross amount, the attorney’s fee, the litigation costs, the liens that must be satisfied, and the net amount you will receive. We negotiate medical liens to reduce the amounts owed and maximize your net recovery. There should be no surprises when the check arrives.
Schwartzapfel Holbrook / Fighting For You