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Lawsuit Settlements and Financial Aid

Colbert NationColbert Nation Posts: 97Registered User Junior Member
I have an interesting question for CCers,

One of my parents is currently a plantiff in a lawsuit that could potentially bring a large sum of money to the family (for legitimate damages). My question is, will a portion of the settlement have to be used to pay colleges? It is unlikely that we'll even get the money until a couple of years but the possibility of my EFC being messed up by a lawsuit is a bit terrifying.

Would a college be so callous as to expect a portion of a lawsuit settlement? Or would they understand that the family would want to use the lawsuit settlement to pay off whatever damages caused the lawsuit to be filed?
Post edited by Colbert Nation on

Replies to: Lawsuit Settlements and Financial Aid

  • somemomsomemom Posts: 9,123Registered User Senior Member
    I don't think it would count until you actually receive the money. It might be an arguable point that winning the judgement would count, but collecting can be difficult and losers appeal, so I would think you would have to be in possession of the funds.

    If you receive the funds you have to declare them, though you could try offering a special circumstances letter regarding why you have the money.

    I do not know if they would count on the FAFSA worksheet as unearned income or just as assets in your possession, but for the asset part, if you pay off debts or whatever you need to do with the money, then those funds will not be assets in your possession
  • calmomcalmom Posts: 15,731Registered User Senior Member
    Depending on the nature of the lawsuit, some or all of the money will NOT be considered taxable income. Your parents will need to double check with their attorney, but generally damages for personal injuries are not considered taxable, because they are legally supposed to be reimbursement for a loss sustained by your parents; however, punitive damages are taxable income, because they are represent a windfall for the plaintiffs meant to punish the defendant rather than reimburse the plaintiffs for their loss.

    Of course, once your parents have the money in hand, it will represent an asset that will have to be reported for financial aid, whether or not there is reportable income. However, your parents might use some of the money to immediately pay off debts that had accrued pending the lawsuit -- for example, it is common that where there are unpaid medical bills, the creditors will simply take a lien against the expected settlement rather than insist on payment. So, for example, your parents might recover $100,000, but there are $20,000 of bills related to the law suit and another $15,000 of credit card bills not yet paid -- your parents would then have only $65,000 left over.

    In any case, I wouldn't worry about it until there is a settlement pending. It is a factor that your parent might take into consideration when it comes to deciding whether to accept a settlement -- after all, there is often room for negotiation.
  • Colbert NationColbert Nation Posts: 97Registered User Junior Member
    It is a personal injury related lawsuit where the settlement will probably be used to reimburse the family for the medical bills that had to be paid in relation to the injury.

    Anyone more familiar with the legal system can help me on this, how long after the beginning of a lawsuit does it take for the settlement to actually be in the hand of the plaintiff? I'm thinking that there's a chance that the money won't be in the family's hands before the end of my undergraduate career but I'm not 100% sure.
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