Is Pre-Settlement Funding Considered Income?

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Is pre-settlement funding considered income?

If you are a party to a lawsuit, then income (or, more importantly, a lack of income) may be a pressing concern for you, particularly if you are injured and unable to work because of injuries you may have sustained in an incident that led you to file a lawsuit in the first place. This may mean that your family is either surviving on just one income, whereas it previously had taken two incomes to support the family. This could mean your family has no income whatsoever, which leaves you even worse off due to whatever incident led you to file a lawsuit.

Without the income you were previously able to earn, you may not have any way to stay current on your mortgage, pay your car note, pay your utilities, or purchase groceries for your family.  

When you are in desperate financial straits, then just receiving money, any money at all, may be sufficient for your immediate needs. You may not even think twice about whether that money will be counted as income come tax time.

Being taxed on money you receive later on is likely not a huge concern if you find yourself in a position of needing money, no matter the amount, immediately.

However, it can be important when considering the long-term ramifications involved for you if you obtain funding in connection with your pending lawsuit and whether or not that money is considered income to you. 

After all, if you obtain $100,000 in pre-settlement funding that you are obligated to pay back in full (plus interest) if your lawsuit resolves in your favor, but you are only able to obtain $70,000 of those funds once the financing is extended due to mandatory tax withholding, this is important information. This is an important detail that you likely want to know.

The positive news for someone who may be in a difficult financial position while waiting on a settlement is that, except in very limited circumstances, a pre-settlement advance ordinarily will not be considered income. As a result, you will not be obligated to pay taxes on a pre-settlement loan.

Pre-settlement funding is rarely considered income.

For tax purposes, the Internal Revenue Service does not consider a pre-settlement loan to be income to the recipient in virtually every scenario. 

The reason for this is simple: a pre-settlement loan must be repaid when the recipient’s case either settles or ends in a jury verdict in the borrower’s favor. Thus, a pre-settlement loan is not really “income” like a paycheck that you earn. Instead, it is a bit similar to a loan that is used to purchase your home or a vehicle, neither of which is taxable as income or an advance that you receive that later must be paid back.  

On the other hand, another critical point to keep in mind is that one of the most important differences between pre-settlement funding and a mortgage or car loan is that pre-settlement loans are non-recourse. This means if your case does not resolve in a settlement or a jury verdict in your favor, you are not responsible for paying the money you received back to the pre-settlement funding company

However, you not being obligated to report those proceeds as income can change if your lawsuit does not resolve in your favor, and you are not obligated to pay the pre-settlement cash you received back. 

Exceptions to the general rule that pre-settlement funding is not considered income.

If you use the money from the pre-settlement loan to buy stocks and/or some other investment that produces income for you or appreciates in value, and then you sell those stocks or otherwise profit from that investment, then the proceeds you received from a pre-settlement loan may be considered income. 

In addition, pre-settlement funding would also be considered income if you do not end up prevailing in your lawsuit, with the consequence being that you are not responsible for paying back your advance. 

That makes some sense, as the loan would be money you received that was never ultimately paid back.

The takeaway.

If you are in a difficult financial position due to an incident that led you to file a lawsuit, you likely did not use the proceeds of your pre-settlement loan to make an investment, and you will more likely than not end up paying back the proceeds of that financing if your lawsuit resolves successfully, so it will most likely not be considered income.

When you’re ready to start taking care of your expenses without worrying whether it is considered income, check out Baker Street Funding lawsuit advances.

At Baker Street Funding, we give you the inside scoop on pre-settlement funding by covering a variety of ... financing and legal topics to help you made the best financial decision for you and for your case. Our experts break down complex ideas in a way that's easy to understand so you can stay informed on current trends as well as tips and fact checked information by the CEO and founder, Daniel Digiaimo. Furthermore, Despite its name, consumer legal funding is not a loan. If you don't win your case, no payment needs to be made back. To avoid confusion and simplify matters on, we'll use the word "loan" throughout this article.

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