Are Pre-Settlement Funds Taxable?

Disclaimer: Consumer legal fundings and advances are not loans under applicable financing laws. Rockpoint’s products are non-recourse, meaning if you don’t win your case, you don’t have to pay us back. Receiving financial support in connection with a legal case is typically (and oftentimes incorrectly) referred to as a “lawsuit loan” or “loan.” Therefore, for the ease of search references, these terms may be used in this context to refer to our funding products, but we maintain our separateness from consumer loan products in all legal aspects. 

Maybe you’re thinking of applying for pre-settlement funding because, after your accident, the expenses are just too much to bear. You’re facing bills from the hospital and have no way to pay them until you return to work. Pre-settlement funding would allow you to pay off those bills, but you’re worried that you might have to pay taxes on the money.

Are pre-settlement funds taxable? Discover the answer in this guide to lawsuit funding.

What Is Pre-Settlement Funding, and How Does It Work?

Some lenders might call pre-settlement funding a loan, but it’s actually a cash advance on your settlement funds instead of a true loan. When you’re approved for funding, the lender gives you a lump sum that’s a percentage of your expected settlement. You can use the funds on anything you need, such as buying groceries, covering mortgage payments, or paying down medical bills.

Pre-settlement funding differs from a loan in that you don’t have to repay the funds until after your case is over. If you do not win your case, you don’t need to repay the lender anything.

Additionally, you don’t need a good credit score or income to qualify for funding as you would for a loan. Lenders provide funding based on the strength of your case, not your personal finances. That means you may qualify even if you’re out of work or have poor credit (or no credit at all).

What Are the Tax Implications of Pre-Settlement Funding?

Pre-settlement advances sound appealing, but what about taxes? Are pre-settlement funds taxable?

According to IRS regulations, pre-settlement funding is classified as “non-recourse debt.” If your funding is for physical damages, you will not owe taxes on it. This includes physical damages you suffered due to a car crash, dog attack, slip-and-fall accident, or medical malpractice. Essentially, if you have a personal injury case, you won’t need to pay taxes on settlement funds, nor do you need to report the funding on your tax return.

However, for your funding to stay non-taxable, you must only use it for “necessary” purposes (more on that below). If you were to use the funding to invest, for example, by purchasing stocks or bonds, you’d owe taxes on the investment gains.

How To Keep Your Pre-Settlement Funds Tax-Free

As mentioned above, as long as you use your pre-settlement funding for “necessary” expenses, you won’t need to pay taxes on it. But what is a necessary expense? Here are some examples to illustrate.

• Jamie needs to go to work, but her car was badly damaged in an accident, and she can’t afford to keep taking rideshares every day, so she applies for pre-settlement funding to repair or replace her car.
• Horatio’s rent payment is due next week, and his landlord doesn’t particularly care that he can’t pay it because of the accident. He requests pre-settlement funding to cover the rent payments until his case is over. Now, Horatio can focus on winning his case instead of worrying about where the rent money will come from.
• Amber had to undergo lifesaving treatment in the hospital after a semi-truck crashed into her car on the highway. While she’s grateful that the hospital saved her life, she’s less than pleased with the bills and how the facility keeps hounding her for payment. She uses pre-settlement funding to pay off her bills and sets a little aside for any future medical bills related to the accident.
• Grant is partially disabled after his accident and can no longer easily move around his home. He has trouble doing all the things he used to do, such as showering, dressing, and cooking meals. He uses pre-settlement funds to hire an in-home assistant to care for him until he can recover.
• Brandy has racked up a lot of credit card debt after her accident due to being out of work. She’s maxed out her cards and now owes over $15,000, and what’s worse, she can’t even make the minimum payments. She applies for pre-settlement funding and uses the money to pay down her credit cards, giving her some breathing room.

Need a Settlement Advance? Here’s How To Apply

Are pre-settlement funds taxable? Usually not, and applying for funding is a smart choice if you need cash sooner rather than later.

Want to apply for pre-settlement funding? There are no credit checks or income requirements, and you won’t have to pay the funding back until you win your case. It’s also non-taxable income, so you won’t owe any taxes on the money unless you use it for investment purposes.

Here’s how you can apply for pre-settlement funding:

1. Select a funding company, such as Rockpoint Legal Funding. Choose your lender based on funding amount, accepted case types, and how fast the lender can fund you.
2. Review the lender’s requirements to make sure you meet them. If you select us, you’ll need to be at least 18 years old, have a valid pending lawsuit, and have an attorney representing you. You must also have an accepted case type. Rockpoint Legal Funding provides advances for personal injury claims such as car accidents and slip-and-fall accidents.
3. Complete a short application and wait for approval. If we approve you, you could have cash in 24 hours or less.

Seek Financial Relief From Rockpoint Legal Funding

Are pre-settlement funds taxable? As long as you use the funds for necessary expenses, you won’t have to pay tax on the money. If you’re ready to apply for funding or want to learn about non-recourse funding vs. loans, reach out to Rockpoint Legal Funding at (855) 626-3214.