Lawsuit Proceeds, Now What......

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Topic Author
SNA2KOA
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Lawsuit Proceeds, Now What......

Post by SNA2KOA »

Hi, new to this forum and looking for some fresh ideas. I recently settled a lawsuit and will be getting 250K. So looking for some ideas on what I should do with it. I am not looking to buy a home where I live as I will likely be moving in the next 12 months. I have some debt which I have outlined below. The debt was mainly accumulated when I was unemployed (due to the circumstances of this lawsuit, it was a wrongful termination case)

Car Loan : 20k@ 1.49%

Student Loan : $33k @ 6.78%

Credit Card : $15K @ 14.99 %

Line of Credit : 15K @ 14.99 %

Personal Loan : 6.5k @ 13.5%

Obviously I want to pay off the credit cards, but does it make sense to pay off the student loan or the car ? It seems I could do better using this money and just keep paying down the car and student loan or is it wiser to pay it all off now and be completely debt free?

I currently contribute 15% into my 401k and will be depositing 5K in a mutual fund a IRA and another 5K in January. I just started this new job on October 1st.

I have been thinking of using some of this money to buy an out of state fourplex and have it managed by a local property manager. Anyone have good or bad experience with this ?

Thanks in advance!
gerrym51
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Re: Lawsuit Proceeds, Now What......

Post by gerrym51 »

although the 1.49 car loan rate is very good if it were me I would just pay everything off.
Spirit Rider
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Re: Lawsuit Proceeds, Now What......

Post by Spirit Rider »

Clearly it makes sense to pay off the credit cards and the personal loan.

There is no where else that you can get 6.78% return on your money risk free, pay off the student loans.

While I am against debt as much as anyone, However, I would differ with the previous poster and say that $20K is a good chunk of money and @ 1.49%, I would not pay that off.
WendyW
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Re: Lawsuit Proceeds, Now What......

Post by WendyW »

Pay off all of your debt except for the Car Loan @ 1.49%

If you can't think of any better use for the remaining funds than buying a CD or leaving the money in the bank, they you should probably pay off the car loan too.
tomd37
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Re: Lawsuit Proceeds, Now What......

Post by tomd37 »

This is a "no-brainer" :oops: Pay off all your debt, establish an emergency fund, and invest anything that remains. Then don't get into debt again....and save the money you were paying monthly on all that debt.
Tom D.
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BolderBoy
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Re: Lawsuit Proceeds, Now What......

Post by BolderBoy »

tomd37 wrote:This is a "no-brainer" :oops: Pay off all your debt, establish an emergency fund, and invest anything that remains. Then don't get into debt again....and save the money you were paying monthly on all that debt.
+1. Free advice doesn't get better than this.
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

Thanks, seems the consensus is to be totally debt free, this seems very refreshing, to bad here in CA, the remaining balance is BARELY a down payment on a home........
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frugaltype
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Re: Lawsuit Proceeds, Now What......

Post by frugaltype »

What do you have in the way of other savings? If you feel that you have a comfortable amount, with or without other savings, I would pay off everything with the possible exception of the car loan. I would pay that off as well, if it were me, I never liked owing money.
tomd37
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Re: Lawsuit Proceeds, Now What......

Post by tomd37 »

But that remaining balance will immediately start increasing when you add all your previous monthly debt payments to your savings. For example when I paid off my mortgage twelve years ago I put that same mortgage payment into a savings account and boy did it grow quickly! :moneybag
Tom D.
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SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

Yes, this is what I was thinking as well. This incident decimated my finances, the settlement was actually much higher, but as usual, the lawyers are the only ones who really win. The court fees here in CA add up REALLY quick. The government is so broke here, they make you pay for a jury and the court reporter! Of course, I spent thousands on jury fees only to have them settle halfway through the trial. Very frustrating, but it is what it is.
hq38sq43
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Re: Lawsuit Proceeds, Now What......

Post by hq38sq43 »

Have you considered that some or all of the proceeds might be taxable income? This can be a tricky question as to which you should probably obtain professional advice.

Best wishes,
Harry at Bradenton
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GTF
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Re: Lawsuit Proceeds, Now What......

Post by GTF »

I would pay off everything as well and be sure to have a highly liquid emergency fund. Cash Flow is King..
It allows you to save even more in the long run.
Chicago60
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Re: Lawsuit Proceeds, Now What......

Post by Chicago60 »

Harry is right. If you did not obtain advice at the time of the settlement with respect to the taxability (or not) of the settlement proceeds, you should consult with a tax attorney or CPA who has experience with the issue.
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SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

The settlement is being worded in a way to make it tax friendly.........it will be left to interpretation should the IRS ever call it into question.
armeliusc
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Re: Lawsuit Proceeds, Now What......

Post by armeliusc »

I would do the following in this order:
1. Pay off all debts

2. Establish an emergency fund, let's say 12 month of living expense. The easiest for now is just to put this in saving account. (You can do CD ladder, or I-bond later if you wish for the EF, but let's keep it simple for now).

3. Max out IRA or Roth-IRA

4. Max out 401K for this year and next year. You can do this by deducting most of your paycheck, or as much as possible, for 401K contribution for this year. For next year you can spread it out over 12-month

5. Use the left over of the cash to supplement living expense since if your paycheck - 401 deduction is not enough.

6. You can buy $10K I-Bond this year, and another $10K next year.
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Watty
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Re: Lawsuit Proceeds, Now What......

Post by Watty »

SNA2KOA wrote:Thanks, seems the consensus is to be totally debt free, this seems very refreshing, to bad here in CA, the remaining balance is BARELY a down payment on a home........

There are a lot of places where you could buy a decent house for cash for $150K, or a very nice house with a modest mortgage.

http://www.realtor.org/sites/default/fi ... -08-08.pdf

Even if you don't have much savings now then with no debt and at most a small mortgage you could save a lot each year even if your income is less in the new location.
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Bogle101
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Re: Lawsuit Proceeds, Now What......

Post by Bogle101 »

May be off topic or too personal for the OP, but if not, could you give the broad strokes on the lawsuit? Sounds interesting.
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Chicago60
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Re: Lawsuit Proceeds, Now What......

Post by Chicago60 »

Sorry for your circumstances, but I am happy you received some compensation for your losses and damages. It is nice that the language in the settlement may prove favorable for you, but I do not think that is the test before the IRS and outcome determinative as to the taxability of your recovery. The IRS likely will look to the nature of your claims and how the damages were calculated. I would (again) urge you to contact a reputable tax attorney or CPA with experience in this area. You do not want to assume the full 250K is not taxable and later discover that in fact it all (or a substantial part) was. You may want to ask whether the defendant (or insurance company) will be issuing you a 1099. Good luck.
dickenjb
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Re: Lawsuit Proceeds, Now What......

Post by dickenjb »

Good for you for doing the right thing.

I would pay off the credit cards and student loans and NOT pay off the car loan, it is so cheap.
Grt2bOutdoors
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Re: Lawsuit Proceeds, Now What......

Post by Grt2bOutdoors »

Keep the car loan, pay off all other debt. The returns on that debt are very "juicy" compared to what you might find in fixed income markets today. Pay it off and be done with it.
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chaz
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Re: Lawsuit Proceeds, Now What......

Post by chaz »

Good info in the forum wiki.
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Re: Lawsuit Proceeds, Now What......

Post by abuss368 »

Forgetaboutit in terms of reviewing the interest rates.

1) Pay eveything off.
2) Emergency fund - pure cash that you will not touch in the future.
3) Invest everything else.

Most important....stay the course!
John C. Bogle: “Simplicity is the master key to financial success."
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gardemanger
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Re: Lawsuit Proceeds, Now What......

Post by gardemanger »

I admire the stand you took, and I also fully understand how disgusting and demoralizing the whole lawsuit process is. Give yourself plenty of time and room to feel what you feel about it. FWIW, I don't think it matters that the guy was a repeat offender and most likely has offended again. You didn't do it because he was an angelic innocent, you did it because police departments SHOULD NOT operate that way and betray the public trust.

Anyhoo, one argument in favor of paying the car off is that you then have the flexibility to sell it, should you have any reason to want to do that - trade up or down if your needs change, or buy a cheaper one and pocket the difference. It makes your car an at-least-sorta liquid asset.

I think the standard advice applies here - don't rush into any major financial decisions soon after a traumatic life event. What you've been through definitely fits in that category. Paying off high-interest debt is a no-brainer and there's no need to put that off...but something like investing in rental real estate is a big commitment, so don't rush into it. You can sit on cash for a little while as you look around. Likely you have emotions around that money, and you might want to let those settle for a while.
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Re: Lawsuit Proceeds, Now What......

Post by Lafder »

I would not invest in rental property in another state. I would want it within an easy drive to be able to check on personally, if I bought any. And the management fees are right out of any profits. Buy a home for yourself before you buy a rental.

I would pay off the debts. Put a set amount aside for downpayment on a house in a safe place. Put the remainder into long term investments per bogleheads investing strategies.

Sounds like you did the right thing. Too bad the world is so complicated that you have had negative consequences. You should have been a hero for speaking up.

Lafder
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BL
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Re: Lawsuit Proceeds, Now What......

Post by BL »

You can put $5.5K into IRA each year.
Any money designated for house or other near term should be in safe bank CDs or equivalents.

EDT: I also strongly urge you to consult a tax expert regarding taxable status of this award.
Last edited by BL on Tue Oct 15, 2013 11:15 pm, edited 1 time in total.
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

Probably a wise decision to sit on the money awhile, certainly emotions tied to it. I wanted so badly to have a jury decide in my favor, but ultimately it was a huge gamble, far too much money to risk as no case is a slam dunk as you never know what the Judge will do after a jury verdict. Here in CA a judge can legally void a juries award and change it. Sounds crazy, but its true. Not sure why we give judges that much power. Its supposed to a jury of your peers, but we're giving away so many of our rights, this doesn't surprise me.
travellight
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Re: Lawsuit Proceeds, Now What......

Post by travellight »

I would pay off all except the car loan.

congratulations on the settlement and I like the stand you took.
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Re: Lawsuit Proceeds, Now What......

Post by LadyGeek »

Bogle101 wrote:May be off topic or too personal for the OP, but if not, could you give the broad strokes on the lawsuit? Sounds interesting.
FYI - I removed the OP's detailed answer to this question, along with follow-up comments.

Consider that this forum is heavily indexed by google. There is far too much information posted; someone familiar with the situation could discover the OP's identity. I may have gotten close knowing nothing about the case... I also agree with the others on taking a stand to do what was right.
======================

Back to your question:

Be sure to check the wiki: Financial planning

The suggestions provided in this thread are good advice. Pay off all of your debts first, then build up an Emergency fund and start investing. This is covered in the wiki article under "Implement the plan."

I'm concerned about:
I have been thinking of using some of this money to buy an out of state fourplex and have it managed by a local property manager. Anyone have good or bad experience with this ?
Being a landlord is a large amount of work. If you've never done this before, and have no desire to spend time dealing with this, then stay away. We discuss this all the time in the Personal Finance (Not Investing) forum. Feel free to start a thread.
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john94549
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Re: Lawsuit Proceeds, Now What......

Post by john94549 »

I echo Harry's concern about the tax consequences of this settlement. Whatever its "structure", you should consult a tax attorney/CPA. Before I retired, I heard tell of many retirement "structures" designed by plaintiff's attorneys (to facilitate a settlement and payment of fees, to them) which blew up on review by the IRS. The plaintiff's attorneys worded it as compensation for something which should have been untaxed, while the IRS took a different view.
Chicago60
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Re: Lawsuit Proceeds, Now What......

Post by Chicago60 »

John, I very much doubt that the wording of your settlement agreement impacted the IRS position one way or another. The IRS will look to the substance of the actual claims and damages recovered and determine taxability, or not, based on IRS regulations. Substance over form.
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Re: Lawsuit Proceeds, Now What......

Post by Minot »

Lafder wrote:... you did the right thing. Too bad the world is so complicated that you have had negative consequences. You should have been a hero for speaking up.
Lafder's "should have been" is misplaced. No question about it, you are a hero. The "should have" applies to your department, who should have recognized and rewarded your heroism.
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

I have an appointment next Monday with a CPA, not much I can do about the IRS I suppose, another government agency that will try and rail me and likely take most of what I was awarded......
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danwhite77
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Re: Lawsuit Proceeds, Now What......

Post by danwhite77 »

If I were in your situation, I'd just pay it all off.
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Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

and thanks for all the positive comments, it's too bad the people who do the law enforcement hiring do no share your support.
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Re: Lawsuit Proceeds, Now What......

Post by Kruid9403 »

The current responses are good but they seem to assume a 0 risk tolerance. I agree to pay off the loans and lines of credit but the car and student loans maybe not. You can get ETF's with a rate that might be worth your while to make the payments while the investment grows.
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SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

A financial planner I consulted with today also suggested to NOT pay off the car or the student loan. I have a good job and can easily afford the payment. The 1.49 percent rate is just too low, he suggested just making over payment to pay it off in 24 months. I also get $250 a month (plus mileage) from my employer as a car allowance, so this essentially lowers my payment even more.

This advisor also suggested some ETF'S that are getting 10 to 12 percent return, some a little higher. Of course no guarantees those returns will continue.

As one member stated, I am not making any decisions until after the new year and all this settles a little.

I will 100 percent be paying off the credit card, line of credit and personal loan as soon as I get the proceeds, but will gain further advice from some other financial people before deciding on the rest. I am leaning towards keeping the car loan as the interest is so minimal.

I am taking a much needed 7 day vacation, off to go diving............
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BolderBoy
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Re: Lawsuit Proceeds, Now What......

Post by BolderBoy »

SNA2KOA wrote:This advisor also suggested some ETF'S that are getting 10 to 12 percent return, some a little higher.
... and after all the help / support we've given you, you aren't going to tell us what those ETFs are?

Enjoy your diving ...

PS - you should RUN from that advisor.
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Dale_G
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Re: Lawsuit Proceeds, Now What......

Post by Dale_G »

Anything with 10-12% returns is very-very-very risky. I don't mind risky investments as long as they are mixed with less risky investments, but I wouldn't touch anything touted as yielding 10%.

You need to find a different financial advisor.

Dale
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BL
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Re: Lawsuit Proceeds, Now What......

Post by BL »

I doubt the "financial planner" is a fiduciary who doesn't manage your money, but rather would gain with more assets under his management and probably get load and/or commissions from everything he sells you. How is that for conflict of interest? The high-return, high-risk ETFs definitely sound like something that will be a gain for him, no matter the risk for you. You could do a lot worse than the Three-fund Portfolio in the Wiki- http://www.bogleheads.org/wiki/Three-fund_portfolio, with a moderate Asset Allocation, at least to start with, and you wouldn't be giving up 1-2% of your gains (AUM + high cost funds) to a broker/adviser.

Good for you for planning to sit on it for a while. There will be all sorts of people wanting to sell you insurance products, funds, and more if they have heard you have sudden wealth, just like for winners of the lottery, etc.

If you don't pay off the lower cost loans, I would suggest you keep that money in a risk-free place: CDs, I-Bonds, etc. The only problem is the low interest you will get if you don't pay them off. Also don't invest most of the money until you have done your taxes and see where you stand.

Best wishes on the handling of this windfall for your future benefit.
camaro327
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Re: Lawsuit Proceeds, Now What......

Post by camaro327 »

I might keep the car loan until I had a good handle on the taxes and the house I was deciding on.

1.49% is not bad for a short period of time such as 6 to 12 months.
MoneyMythsSolved
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Re: Lawsuit Proceeds, Now What......

Post by MoneyMythsSolved »

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Last edited by MoneyMythsSolved on Thu Dec 04, 2014 3:45 pm, edited 1 time in total.
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

Hello everyone, thank you for the suggestions and guidance, it is much appreciated.

I decided to pay off all the credit cards, LOC and student loan. I kept the car loan @1.495 , but will be making over payments to have it paid off in 20 months. The rest of the cash I am just sitting on for awhile and let the holidays pass and everything else settle in before making any decisions.

I will be opening a Roth IRA via the backdoor workaround. I am looking at a dividend paying stock fund like VDIGX to mix into my lazy fund portfolio, does anyone else use this or mix it into their portfolio ?

Any suggestions what I can blend this with ?
Chicago60
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Re: Lawsuit Proceeds, Now What......

Post by Chicago60 »

SNA: I am curious, should you decide to answer, what did the accountant tell you as to the taxability, or not, of the settlement?
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

I retained a CPA firm in LA that specializes in these types of issues, based on the settlement wording and the injuries I suffered, non taxable.
MoonOrb
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Re: Lawsuit Proceeds, Now What......

Post by MoonOrb »

What's the rationale for complicating your portfolio by adding a "dividend paying stock fund?"
Topic Author
SNA2KOA
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Re: Lawsuit Proceeds, Now What......

Post by SNA2KOA »

None really, just looking at options, options are always good.....
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