How Long Can You Hold Settlement Funds While a Lien Is Disputed?

You can hold the disputed amount for as long as the dispute genuinely continues. You generally cannot hold the rest. Most jurisdictions require prompt disbursement of funds a client is entitled to receive, and an unresolved third-party claim over part of a settlement does not suspend that obligation as to the other part. The remedy is a holdback: disburse the undisputed portion, reserve the contested amount in trust, and carry the reserve as its own line on the client’s ledger.

How long the reserve can sit, and what you must do if the dispute never resolves, varies by jurisdiction. Check your state’s rule on prompt payment and on unclaimed or disputed funds rather than working from a general answer.

Disburse what nobody is arguing about

Start by separating the settlement into three parts.

Amounts nobody disputes. The firm’s fee under an authorized settlement statement, costs the client agreed to reimburse, lien payoffs at agreed amounts, and the client’s net share of the remainder. These go out.

The disputed amount. The gap between what a lienholder claims and what the firm believes is owed, plus margin to stay safe if the dispute resolves badly. This stays in trust.

Amounts under a claim of unknown size. A lienholder who has asserted an interest without stating a figure. Reserve a defensible estimate and document how you arrived at it.

The reason to split rather than hold everything is that the client’s undisputed money is the client’s. Holding a full settlement for six months because a $4,000 medical lien is contested creates its own exposure, and it is exposure the firm chose. Our guide to holding settlement funds when there are third-party medical or Medicare liens covers which claims genuinely bind the firm and which are demands the client can direct you to contest. A statutory or contractual lien the firm has been put on notice of is one thing, and a provider letter asserting a balance is often another. Write down which you concluded each was.

Carry the reserve as its own client sub-ledger

This is where firms lose track of holdbacks.

The reserve stays in the client trust account. It does not move to a separate holding account, and it does not become firm money because the firm may eventually keep some of it. On the client’s individual ledger it appears as its own identified balance: disputed lien reserve, with the claimant named and the amount stated.

That produces three things you will want later.

The client ledger stays true. A three-way reconciliation compares the trust bank balance, the firm’s trust liability, and the sum of individual client ledgers. A reserve that exists only in someone’s notes leaves a client balance nobody can explain. Our walkthrough of the three-way reconciliation process covers the comparison.

The reserve stays visible. A named, dated line item is something a monthly review surfaces. A residual balance under a closed matter is something nobody looks at for two years.

The client can be told the truth. “We are holding $4,200 against the disputed hospital claim, and the balance of your recovery went out on the ninth” is a complete answer, and a better conversation than one that starts with the client asking where their settlement is.

Our complete guide to managing settlement funds in your client trust account covers the disbursement sequence around the reserve.

Document the reserve at the moment you create it

A holdback is a decision, and decisions age badly without a record.

At the moment you set it, capture the claimant’s identity, the amount claimed, the amount reserved, the basis for the difference, the date, and the client’s acknowledgment. The settlement statement is the natural home, since it already itemizes every deduction the client authorized. Our post on the frozen settlement statement covers why fixing that document at authorization protects the firm.

Then set a review interval and keep it. Monthly is reasonable. At each review record what happened: an offer made, a response received, silence. A reserve with a documented trail of six negotiation attempts is a firm managing a dispute. The same reserve with no record is a firm sitting on client money, and from the outside the two are indistinguishable.

When the dispute does not end

Disputes stall. Lienholders stop responding, entities dissolve, and a claim can go quiet without ever being withdrawn.

Holding funds indefinitely is not a resting state, and this is where jurisdiction matters most. Depending on where you practice and what the dispute involves, the paths include interpleader, depositing the funds with a court, resolving the claim through the applicable statutory process, or eventually escheating the funds as unclaimed property. Dormancy periods, notice requirements, and procedure vary meaningfully between states.

What is consistent everywhere: the decision belongs to counsel, it should be made on a timeline rather than by default, and the funds stay in trust with an intact client ledger until it is. A reserve dormant for a year is a question your firm should be asking itself before anyone else does.

Frequently asked questions

Can I hold an entire settlement because one lien is disputed? Generally no. Most jurisdictions require prompt disbursement of amounts the client is entitled to receive, and a dispute over part of a settlement does not justify holding the rest.

Where do the held funds sit? In the client trust account, on that client’s individual ledger, identified as a reserve against the named claim. They do not move to a separate account and they do not become firm funds.

Does the client have to agree to the holdback? The client should be informed and should acknowledge it in writing, normally on the settlement statement. Where the firm is independently obligated to honor a lien, the client’s disagreement does not release that obligation.

What if the lienholder never responds? Set a decision date rather than waiting indefinitely. Interpleader, court deposit, and unclaimed property procedures are the usual paths, and which applies depends on your jurisdiction and the nature of the claim.