What You Should Know About Judgments from Litigation Settlements

What is a settlement?

A litigation settlement is a decision between the parties to end a dispute before trial.  A settlement may be reached after only a few conversations between attorneys, or it may happen a few hours before trial ends.  Oftentimes, a settlement is a preferable outcome to litigation because of the high financial and time costs of a trial.  It is up to you whether to pursue a settlement.  Sometimes a settlement involves mediation, the court, or only the parties, depending on the issues, the parties, and the stage of litigation.  The parties to a settlement usually agree to confidentiality so the public does not have access to the amount or terms of the settlement.

What is a judgment?

A judgment is a final decision about the rights and liabilities of the parties in a legal action.  Once you enter into a litigation settlement, your case is complete.  Terms of a settlement include an agreement to give up the right to pursue additional legal action on the case.  Depending on the stage of litigation, the settlement may be submitted to the court and the court will enter a judgment, making it enforceable by the court.  A settlement does not always involve the entry of a judgment; however, a judgment is required if you want to utilize the courts to enforce the agreement.  Breaching the terms of a judgment entered by the court may lead to the breaching party being held in contempt of court.

Tax-consequences of a settlement

Depending on the claims involved, there are different taxation considerations. For example, recovery on account of physical injuries, including for pain, suffering, and lost wages, is not treated as income for tax purposes.  However, any punitive damages are not excluded from gross income for tax purposes.  If you are the party paying the settlement, there are also taxable deductions to consider.  Overall, it is important to consider the tax consequences before entering into a settlement agreement.

If you are involved or going to be involved in litigation, contact Sean Foss or Sarah Aaberg at O’Keeffe O’Brien Lyson Foss in Fargo, North Dakota to discuss your case or call 701-235-8000 or 877-235-8002.

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