Thanks for your quick reply! To clarify:

The invoice balance to customer is 130,000. 

Settlement is 145,000 INCLUDING the 20,000 that the customer agreed to pay OUR lawyer during negotiations. Our lawyer will get a check for 145,000, then take his cut of 20,000,  and will give us a check for 125,000.

Do I just apply the 125,000 and record a 5,000 loss (bad debt) on the invoice? 

I just am not sure if the 20,000 that the lawyer gets directly from the customer (and we never take in) gets put anywhere in MY books as $ received and gets paid as legal fees from us.