What Every Client Should Know About Contingency Fee Agreements

The prospect of hiring a lawyer for your personal injury or medical malpractice claim may seem dauntingly expensive. On top of your medical bills, lost wages and other expenses, you may be under the impression that a lawyer will further cramp your wallet and not be a huge help towards winning your case. If you hire the right attorney, they will only charge a contingency fee, and be of crucial assistance in winning your claim.

What Is a Contingency Fee?

A contingency fee means that a lawyer won’t earn payment unless they win your case. Even if your case is lost, though, you may still have a few things to pay for, such as court costs or the expense of an expert witness. As with anything, there are pros and cons when it comes to a contingency fee arrangement with your lawyer.

Disadvantages

One of the disadvantages is seeking a lawyer willing to work on contingency. If they view your case as risky or otherwise can’t be certain of its outcome, they may be unwilling to take the chance of representing you.

A contingency fee is usually one-third of the amount you are awarded. Depending on the specifics of the agreement with your attorney, this is true whether it takes one week to reach a settlement or one year to win a trial. So if it takes little time for your case to be settled, the lawyer will cost more than they would have with normal hourly billing fees. However, the disadvantages of a contingency fee are still outweighed by the benefits.

Advantages

One of the advantages of a contingency fee agreement is that you can negotiate the contingency fee. If you happen to be of lower income, this allows you to hire quality legal representation rather than an inexperienced attorney. Also, if your claim is decided within a week or two, this means you’ll have a little flexibility in terms of how much you pay to your lawyer.

Another advantage is you not owing any attorney fees if you lose your case; this will likely act as motivation for the lawyer, who will do everything in their power to win your case so they can be paid for their work.

Tax Implications

In many situations, the contingency fee you pay to your lawyer may be tax deductible. The expenses for your injuries can be tax deductible as well, but if you are reimbursed for those expenses after winning a personal injury claim, you’ll have to pay taxes on them. You cannot preemptively – that is, future expenses – deduct taxes from medical treatment you have not yet received.

Let’s say you receive $10,000 in damages; you retained your lawyer on a contingency fee basis, and owe them $3,500 of that. You actually get taxed on the full $10,000, even though you only see $6,500 of it. However, if all the money you are awarded is compensatory and not punitive in a personal injury case, that is usually tax free.

The tax implications of your settlement and the benefits of hiring a lawyer on a contingency agreement are complicated, and while they are consistent in most personal injury cases as outlined above, it’s still important to be sure of all consequences by consulting with a tax expert. Hiring a lawyer who is willing to negotiate their contingency fee based on the length of deliberation and the amount of the award will be of great help as well.