Things You Need to Consider Before You Cash Your Settlement Check

After a lengthy legal process, maybe an accident, injury case, or any other legal matter, you finally receive news that your settlement has been approved. That check feels like a reward for everything you’ve gone through. 

And yes, it can bring some financial relief. But before you rush to cash your settlement check, you should know a few essential things. 

It’s not just about walking into the bank and getting the money. You need to be wise, careful, and prepared.

If this is your 1st settlement, it might feel confusing. The legal terms, the paperwork, and the waiting are a lot to do in a single go. 

That’s why it’s essential to navigate the settlement process properly. Understanding what to expect will help you make better money choices and avoid mistakes that may cost you money afterward.

1. Make Sure All Deductions Are Clear

Before you even cash your check, ask yourself: “Is this the whole amount I get?” Sometimes your attorney or the insurance company takes a portion cut for things such as legal costs, unpaid debts, or medical bills. You need an apparent breakdown. 

If uncertain, ask your attorney for a written statement on what is taken out and why. This is your money – you deserve to understand it.

2. Talk to Your Lawyer One Last Time

Do not skip the final discussion with your attorney after concluding your case. Ask if there is something else you should do or know before depositing or even spending the money. 

Your lawyer can tell you if there are waiting periods, tax issues, or final documents you should sign. This step can protect you from future surprises.

3. Be Careful with Taxes

Not every settlement is tax-free. While many personal injury settlements aren’t taxed, other types, such as lost wages, emotional distress unrelated to an injury, or interest, may be. 

Consult a tax specialist or accountant before using the funds. They’ll guide you on setting some of it aside for tax time. You don’t want to spend it all and owe the government months later.

4. Open a Separate Bank Account

Depositing your settlement check into your regular bank account can mix in with your everyday money. 

You can manage it better by opening a new account for your settlement. This can help you track how much you spend and help you stay away from inadvertently spending it on things you did not want.

5. Beware of Scammers and Pressure

And unfortunately, when people hear you got a settlement, they might try to prey on you. This could be someone selling you something unnecessary, pushing you into “investment deals,” or asking for loans. 

And you owe no one because you have money now. Protect yourself. Say no to everything that feels rushed, unclear, or even too good to be true.

6. Think Long Term

Or perhaps your settlement is large enough to alter your life or small enough to get you back on your feet. 

Either way, look beyond the next couple of weeks. If you’ve no clue how to handle it, consult a financial advisor. 

They can help you budget or plan to make your settlement check last. Your future self will be glad you were smart today.

Real-Life Lessons: A Tale of Two Outcomes!

Let’s take a look at two fictional but realistic examples, shall we? 

Case One: Sarah

After a minor automobile accident, Sarah received a settlement of $25,000. She paid off a couple of debts outright and bought a new car. 

In a matter of months, the money was gone. When there were medical bills afterwards, she did not have savings. Consequently, she’s once more been forced to live on credit cards.

Case 2: James

James was settled for $30,000. He consulted a financial advisor, made a plan, and invested half in an emergency fund. 

The rest was used to pay off debt and subsequent medical needs. A year later, he still has emergency funds and has peace of mind.

The difference? Planning.

Understand Structured Settlements vs. Lump Sum

When a legal settlement is successfully won, one typically has two main choices regarding payment of the money:

Lump Sum Payment

This is when you receive your full settlement amount in one payment—a total check for the amount.

Advantages:

• You receive all your funds simultaneously.
• It is available for you to spend now on debt, hospital bills, or investments.
• It offers more flexibility and control.

Disadvantages:

• One would be inclined to spend it fast.
• If not properly handled, the money can be used up fast.
• He would face greater taxation implications if some portion of the settlement is subject to taxation.

Structured Settlement

This arrangement involves the payment of smaller sums over an extended period of time—monthly, annually, or based on a mutually agreed-upon schedule.

Pros:

• Helps to attain long-term financial security.
• Enables budgeting since funds can be obtained in phases.
• It oftentimes brings tax benefits, depending on specific situations.
• It can also comprise a guaranteed income for several years or even for a lifetime.

Disadvantages:

• Less flexibility—you can’t borrow the whole amount at once.
• During an emergency, you might not be in a position to spend a lot of money at a time.
• Changing the terms later can be difficult.

So, which one would you choose?

It’ll depend on your needs, objectives, and financial management plan. A lump sum is suitable if you’re responsible with finances or have to settle enormous bills immediately. 

However, if you’re concerned about blowing cash too quickly or want to secure long-term income, a structured settlement check could be a better option.

Tip: Always seek the advice of a financial advisor and your lawyer before making a choice. They can help you decide the long-term effects of each choice and create a strategy that is compatible with your goals.

Final Thoughts

You’ve been through a lot to get to this point. That settlement check is more than just a piece of paper; it represents your struggle, patience, and right to justice. 

So, take a breath. Don’t feel rushed. Use your head and heart to make the best decisions with your money.

Remember: just because you can cash out doesn’t mean you should do it immediately. Think it through, ask questions, and make a plan that supports your goals, not just for today, but for tomorrow too.