A Guide to Legal Settlements in the US

A legal settlement is an official agreement intended to resolve a dispute without a trial. Settlements help to avoid the costs and impact of litigation on the legal system and on the parties involved. The insights below will help you negotiate a settlement you can live with.

What is a legal settlement?

A legal settlement is an official agreement intended to resolve a dispute without a trial. It is a contract that essentially says the plaintiff will voluntarily dismiss the lawsuit if the defendant provides compensation that is acceptable to the plaintiff. As with other contracts, a settlement requires an offer, acceptance, consideration, and a meeting of the minds. That is, both parties must agree on the same terms, conditions, and subject matter of the contract. A settlement halts the litigation process. Most civil lawsuits end in a settlement.

Advantages of legal settlements

The advantages of a settlement are many.


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  1. If the settlement is done right, each party to the agreement feels as if justice was served and the process was fair.
  2. The parties avoid the high cost of litigation.
  3. Settlements are less time-consuming than litigation.
  4. Settlements don’t require nearly as many resources as trials do.
  5. Settlements are less stressful than litigation.
  6. Settlements provide a level of privacy that a trial would not commonly afford.
Are legal settlements taxable?

Since most settlement money is considered income, the funds might be taxable. There are, however, some that aren’t. Below are examples to consider.

  • Loss of Wages. If the lawsuit stems from a loss of wages, the settlement is generally considered taxable as wages.
  • Negligence. In contrast, if the case arises from negligence in building a condo, the damages could not be regarded as income and instead reduce the condo’s purchase price.
  • Physical Injuries or Illness. Damages related to physical injuries and illness are tax-free. Emotional Distress. Damages related to the intentional infliction of emotional distress are taxed.
  • Compensatory Damages. Most compensatory damages, like medical and hospital bills, physical therapy, and other expenses paid to treat visible injuries are not taxable. These are considered expenses you’ve already incurred and are being reimbursed for. 
  • Punitive Damages. Punitive damages are taxable.
How to negotiate a settlement

To receive a fair settlement, effective and strategic negotiation techniques are essential. Before the negotiation conversation, it is generally recommended that each party determine their desired outcome and bargaining limits. The list below provides settlement negotiation steps to consider.

  • Plan for the conversation and set a goal for settlement.
  • Gather pertinent background information in an organized and concise format.
  • Evaluate all relevant information, including your own strengths and weaknesses.
  • Brainstorm your negotiation tactics and strategy.
  • Determine your first offer and counter-offer.
  • Create a negotiation plan that takes into consideration your leverage.
  • Review your negotiation plan and be comfortable with the relevant talking points.
  • Practice explaining your first offer and counter-offer with a family member or friend.

Settlements play an essential role in the litigation process. In fact, in the U.S., most civil cases end in settlements. They are as commonplace as speeding in the fast lane. They’re the norm. So, it’s no surprise that the players in your case, including judges, clerks, attorneys, and paralegals, expect a settlement. Even if you too want a settlement, don’t go away dissatisfied. Do your homework, and leave the negotiating table with a settlement you can live with.

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