Generally, unless you meet an exception as listed in this link, legal settlements are taxable.
However, since you were able to retain the car and are still liable for any exisiting loans, only the portion of the settlement that exceeds your adjusted basis in the property would be taxable. If you paid in $28,000, but received a settlement of $25,000, then the amount you received is less than your basis and it would not be taxable. Please see IRS Publication 4345 for more details.
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