When your personal injury case settles, you know the settlement, but you don’t know the most important number – that is, how much to take home (your part after everything is paid). This FAQ will explain in detail the process for reaching that number.
I have often said the biggest mistake personal injury claimants make is focusing solely on the settlement amount. The settlement amount is only half the equation. The other half of the equation, and equally important, is what must be paid out of the settlement. The settlement amount, combined with what must be paid out, to give you your take home amount (the amount you walk away with after all bills and expenses have been paid). The amount is the most important number you should focus on and ultimately is the only number you should care about.
Here is the equation:
Settlement amount - Amount paid out = Client Take Home Amount
Example: $25,000 Settlement - $10,000 Expenses = $15,000 to the client
Keep in mind that prior to any settlement, your attorney (if you have one) should be able to help you know a ballpark range of what your take home amount will be at any settlement amount. Thus, prior to agreeing to a settlement, most of the time, you will have the benefit of knowing approximately how much that settlement will provide you in take home pay.
At the end of a case when your money is ready to be distributed to you, your attorney will (should!) provide an itemized statement showing the distribution numbers. This itemized distribution document will show you the exact amount of your settlement, and anything that has been paid out of that settlement on your behalf. It will also show you how much you are getting. This is important for you to receive because it helps you know exactly where your settlement funds used and how your take home amount was calculated. This provides complete transparency.
There are three main expenses that must be paid from your settlement:
- Legal Expenses
- Medical Bills
- Liens
So let’s dive in and take a look at what will come out of that settlement, so you can better understand how much you’ll likely receive. To best demonstrate how these expenses work, let’s use a fact pattern that will provide an example we can use to show how each of these works.
Facts: You were in a car accident caused by a negligent driver. You suffered injuries that required an ER visit, some physical therapy, and a visit to your primary care doctor. You had medical bills of $6,000. You hired an attorney who obtained a $15,000 settlement for you.
Legal Expense
Under the category of legal expenses, you will typically see three numbers: the attorney fees, the sales tax on attorney fees, and the case costs.
- Attorney Fees: If you have had the assistance of an attorney, you will pay a contingency fee that you agreed to when you hired the attorney. That fee is often a one-third contingency fee (33.33%) of your total recovery. That means that you will owe one-third of your settlement amount. Remember, your attorney fees are not based on the amount you take home after bills are paid. The attorney fee is calculated on the total amount recovered for you in the case.
Example: If your settlement was $15,000. Your attorney fee would be $5,000.
- Sales Tax (Gross Receipts Tax) on Attorney Fees: You will have to pay the state sales tax on the attorney fees. That tax does not go to the attorney but is paid to the state for the sales tax on the legal services. The amount of tax will be determined by the sales tax rate in the state/county your attorney practices. It tends to be around 7-8% of the amount of your attorney fees (not the amount of your settlement).
Example: If your settlement was $15,000. Your attorney fee would be $5,000. The sales tax owed at a 7% sales tax rate would be $350.00 ($5,000 x .07).
- Legal Costs: You will owe the attorney costs on the case. These are the expenses your attorney has paid out of pocket for you in the prosecution of your case. This will typically be expenses like costs of obtaining medical records/bills charged by medical facilities, expert witness fees (if your case required hiring expert witnesses), court costs, and any other expense where your attorney paid an expense for you to prosecute your case. These are different from attorney fees. Fees are for the legal services provided. Costs are the expenses paid on your behalf, which is why costs must be reimbursed. Your case will have a “cost bill” showing each cost spent on your case so when you see the case costs show up on your distribution letter, you will know where each number came from.
Example: Your case didn’t have an expert. You had $100 in costs related to getting your medical records and bills, and $25 to get the law enforcement lapel video and scene photos. Your total cost bill is $125.
Medical Bills
Your medical bills for treatment related to your accident must be paid from the settlement. In some situations, your health insurance (or some other insurance) may have paid some or all your medical bills. Any medical bills that have not been paid (i.e. they are outstanding), must be paid out of the settlement. Your attorney will work to negotiate and reduce any bills to maximize your take home amount.
Example: Your only outstanding medical bill was for a visit to your primary care doctor for $200.00. Your health insurance paid the rest of your medical bills.
Liens / Subrogation / Reimbursement
Liens are legal claims that health insurers, Medicaid, Medicare, and some other insurance providers can place on your settlement asserting a right to be reimbursed out of your settlement proceeds for expenses paid out on your behalf.
Example: Your health insurer Blue Cross Blue Shield paid your ER bills for your hospital, radiology, and ER physician treatment. Your health insurance also paid for your physical therapy. The total amount paid out by your health insurance was $3,000. (Remember your health insurance often pays a contract rate so it will usually be less than the amount charged to you by the medical provider). Thus, the health insurance has a lien for $3,000 that you must pay out of your settlement.
In most situations, your attorney can negotiate a reduction with the lienholder to reduce what you must repay. A one-third reduction is often achievable.
Example: Your attorney secured a $1,000 reduction off the $3,000 lien amount, reducing your lien amount down to $2,000.
Now that we know all the amounts that must be paid out, we can calculate your take home amount. Your distribution would look like this:
Settlement Amount: $15,000.00
Legal Expenses
- Attorney Fees: $5,000.00
- Sales Tax: $350.00
- Case Costs: $125.00
- Total Legal Fees: ($5,475.00)
Medical Expenses
- Primary Care Doctor ($200.00)
Liens
- Blue Cross Blue Shield ($2,000.00)
Total Amount Paid out of Settlement ($7,675.00)
Money to Client $7,325.00
In this small hypothetical, you can see exactly what your expenses were and the specific breakdown of the settlement funds. The client would receive a check for $7,325.00. Nothing else has to be paid out of that amount.
That is the client’s take home amount.
While each case will differ, these are the same categories of expenses in almost every case, so you can use this sample to understand what must be paid out and more importantly, calculate how much you will receive.
Get Answers After an Accident—Schedule Your Free Consultation Today!
Our dedicated personal injury team here at The Injury and Disability Law Center is here to help you if you have any questions after an accident. Schedule your free initial consultation today by calling our office at 575-300-4000, starting a chat, or filling out our online form.
If you want even more information, feel free to check out my free book, Car Accident Cases Made Simple(r), where I discuss this topic and more.
