Winning a large personal injury settlement is often a moment of relief. After months or years of uncertainty, you finally have financial resources to support your recovery and protect your family.

But many people quickly discover that receiving a large payout also brings new risks. Without careful planning, even multi-million-dollar settlements can disappear in just a few years.

The good news is that most settlement failures trace back to a handful of predictable mistakes. By avoiding them, you dramatically increase your odds of long-term security.

Here are the five most common mistakes people make with large settlements—and how to avoid them.

Mistake #1: Spending Too Quickly

It’s natural to feel the urge to spend when you finally receive your check. Some people buy new homes, cars, or take expensive trips within weeks of their payout. Others feel pressure to help family or friends financially.

The problem is simple: settlements are meant to cover a lifetime of expenses, not just today’s wants.

Colorado examples show this clearly. A family in Aurora received a seven-figure settlement after a catastrophic car accident. Within three years, they had upgraded homes twice, financed new vehicles, and spent lavishly. By year four, the money was gone, leaving nothing for ongoing medical costs.

How to avoid it:

Separate immediate needs from long-term expenses.
Place funds in a dedicated settlement account before making any purchases.
Work with a financial advisor to create a staged budget for medical care, income replacement, and family needs.

Mistake #2: Ignoring Liens and Subrogation

The number on your settlement agreement is not the amount you take home. Colorado law requires repayment of medical liens and subrogation claims before you can freely spend the money.

These obligations often include:

Hospital liens for emergency treatment.
Health insurance subrogation if your insurer paid for accident care.
Medicare or Medicaid set-asides to protect future benefits.

If you ignore or underestimate these obligations, you may find your “settlement” shrinking dramatically. Worse, mishandling them can result in lawsuits or loss of benefits.

How to avoid it:

Ask your attorney to clearly calculate the net settlement after all liens.
Negotiate lien reductions where possible.
Set aside funds immediately for required government reimbursements.

Mistake #3: Poor Investment Choices

A large settlement may feel like an opportunity to grow wealth quickly. Unfortunately, many recipients fall victim to predatory investment schemes or high-risk ventures.

Examples include:

Friends or relatives pitching “can’t-miss” businesses.
Salespeople offering complex financial products with hidden fees.
Risky stocks, cryptocurrency, or speculative real estate ventures.

These risks are magnified in Colorado, where fast-growing industries like tech startups and cannabis attract speculative investment pitches.

How to avoid it:

Work only with licensed, fiduciary financial advisors.
Focus on conservative, diversified investments.
Follow the rule: if you don’t understand it, don’t invest in it.

Mistake #4: Failing to Plan for Taxes and Benefits

Most personal injury settlements for physical injuries are not taxed. But some components, including punitive damages, interest, or compensation for lost wages, are taxable under federal law.

Colorado recipients may also face state-specific tax considerations. If you assume everything is tax-free, you risk unexpected IRS bills.

In addition, failing to coordinate your settlement with Medicaid, Medicare, or Social Security benefits can cause catastrophic losses of coverage. Without special needs trusts or set-asides, you may become ineligible for programs that provide essential medical care.

How to avoid it:

Consult a tax advisor before spending any settlement funds.
Establish special needs trusts or set-aside accounts where necessary.
Reassess your eligibility for Colorado-based benefits to avoid disruption.

Mistake #5: Forgetting Long-Term Costs

Settlements are designed to cover decades of expenses. But many people plan as if the money needs to last only a few years.

Common overlooked costs include:

Medical inflation – the cost of rehab, therapy, and hospital care continues to rise in Colorado.
Housing needs – modifications for disability access, long-term maintenance, or relocation.
Income replacement – settlements often cover decades of lost wages, not just today’s bills.
Retirement savings – if injuries limit your ability to work, your settlement may need to function as your retirement fund.

How to avoid it:

Build a financial plan that looks 10, 20, and 30 years ahead.
Revisit your plan annually to adjust for inflation and changing needs.
Use structured settlements to guarantee income streams far into the future.

Colorado Case Example (Anonymized)

A Denver man received a $1.5 million settlement after a trucking accident caused permanent back injuries. Within two years, he had purchased a luxury vehicle and vacation property, and invested heavily in a speculative business. At the same time, he failed to set aside funds for Medicare obligations. By year five, the money was gone, Medicare had suspended benefits, and he faced mounting medical bills.

Contrast that with another Colorado client who received a $950,000 settlement. By working with her attorney and a financial planner, she negotiated medical liens, placed funds in a structured settlement, and invested conservatively. Ten years later, she continues to have steady monthly income, preserved her Medicaid eligibility, and maintained her home.

The difference came down to avoiding the five common mistakes.

Conclusion: Protecting Your Settlement for the Future

Large settlements represent justice, compensation, and a second chance at financial security. But without discipline and planning, they can vanish as quickly as lottery winnings.

By avoiding the five most common mistakes—spending too quickly, ignoring liens, making poor investments, failing to plan for taxes and benefits, and underestimating long-term costs—you can transform your settlement into lasting independence.

Contact Flanagan Law Today 720-928-9178

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