How Personal Injury Settlements Are Distributed: A Step-by-Step Guide for Law Firms

When a personal injury case settles, the money does not go straight to the client. The settlement check is deposited into the firm's client trust account. Once the funds clear, the firm pays its attorney fee, reimburses case costs, pays medical liens and other claims, and sends the rest to the client. The client approves every number on a signed settlement statement before anyone gets paid.

That is the short version. Below is the full settlement disbursement process, with a worked example, so your team can handle each payout the same way every time.

Who gets paid from a personal injury settlement?

Most settlements are split between four groups:

• The law firm, for its contingency fee
• The firm, again, for case costs it advanced, such as filing fees, medical records, and expert fees
• Lienholders, such as hospitals, doctors, health insurers, Medicare, and Medicaid
• The client, who receives the net amount

Some cases also include a referral fee to another attorney. Every one of these payments comes out of the trust account, and every one must appear on the settlement statement.

The settlement disbursement process, step by step

Step 1: Get the release signed and the check issued

The client signs the release, and the firm sends it to the insurance company. The insurer then issues the settlement check or wire. Track the date you sent the release so you can follow up if payment is late.

Step 2: Deposit the funds into the client trust account

Settlement money belongs to the client until it is distributed, so it goes into your IOLTA or client trust account, never your operating account. Record the deposit on that client's ledger the same day.

Then wait for the funds to clear. Paying out against a check that has not cleared can mean using other clients' money, which is one of the most common trust account violations.

Step 3: Confirm final lien amounts

Do not pay liens based on estimates. Request a written payoff letter from every lienholder. For Medicare, you need the final demand letter before you pay.

This step causes most delays, so start lien work when the case settles, not when the check arrives. If you negotiated reductions, get the reduced amount in writing.

Step 4: Calculate the attorney fee and case costs

Pull up the signed contingency fee agreement. It should say whether the fee is calculated before or after case costs are deducted. That detail changes what the client receives, so follow the agreement exactly.

Total the case costs from your records and attach receipts or an itemized list.

Step 5: Prepare the settlement statement

The settlement statement, also called a closing or disbursement statement, shows:

• Gross settlement amount
• Attorney fee and how it was calculated
• Itemized case costs
• Each lien, by name, with the original and negotiated amount
• Any referral fee or other deduction
• Net amount to the client

Under ABA Model Rule 1.5(c), the client must receive a written statement showing the outcome and how the payout was calculated. Most states follow a version of this rule, but check your own state's requirements.

Step 6: Review the statement with the client and get a signature

Send the statement before you meet so the client has time to read it. Walk through each line, especially the liens. A client should never learn about a lien for the first time on the settlement statement.

Get the client's signature approving the distribution before any money moves.

Step 7: Disburse the funds from trust

Pay the fee to your operating account, reimburse costs, pay each lienholder, and pay the client. Make sure every payment matches the signed statement and that the client's ledger ends at zero, never below.

If part of the money is disputed, for example a lien still in negotiation, hold only that amount in trust and pay out the rest. ABA Model Rule 1.15(e) covers this situation.

Step 8: Reconcile, record, and close the file

Record each payment on the client ledger. Your next three-way reconciliation should show the bank statement, the trust account journal, and the client ledgers all in agreement. Save the signed statement, payoff letters, and proof of payment. The ABA model rule calls for keeping trust records for five years after the representation ends, and some states require longer.

A worked example

Here is a sample case with a $120,000 settlement, a one-third fee calculated before costs, and $5,000 in case costs. The medical liens were $32,000 and were negotiated down to $25,000.

If the same agreement calculated the fee after costs, the fee would be one-third of $115,000, or $38,333.33. The client would receive $51,666.67. The difference comes entirely from the wording of the fee agreement.

Common mistakes to avoid

• Paying out before the settlement check clears
• Using estimated lien amounts instead of payoff letters
• Missing a lien, especially Medicare or a health plan
• Moving the fee to operating before the client signs
• Leaving a client ledger with a negative balance
• Vague cost entries like "miscellaneous expenses"

How to speed up settlement distribution

Most delays come from three places: lien resolution, chasing documents, and building the statement by hand. Start requesting payoff letters as soon as the case settles. Keep case costs updated throughout the case, not at the end. Use one template for every settlement statement.

Software helps here too. CaseQube's personal injury settlement workflows calculate payout allocations and attorney splits from the case data, and its legal accounting tools keep trust balances in the same system as the matter.

Frequently asked questions