What Happens to Lawsuit Money in a Divorce?

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Yours, mine or ours. If one spouse wins money from a personal injury lawsuit, its disposition in a divorce depends on the state in which the couple lives. Some states look to the reason for the award and divide it between the spouses on that basis; other states focus on the timing of the lawsuit.

Marital or Separate Property

Most assets a couple acquires during a marriage are subject to court division in a divorce and in some states, courts can also divide property acquired before marriage. Assets can be assigned to one spouse as his separate property or to both spouses as marital property that must be divided according to state laws. The two primary systems of property division are community property, which divides all marital property equally, and equitable division, which divides all property fairly but not necessarily equally.

Personal Injury Awards

Determining whether property is separate or marital can be tricky when one spouse has won a monetary award for damages in a personal injury lawsuit. Personal injury cases include actions for medical malpractice, negligence, slip and fall incidents, and automobile accidents. The settlement or award can reimburse the spouse for different types of damages such as past and future medical bills, pain and suffering, and economic loss.

Analytical Approach

In some states, including most community property states, divorce courts separate a malpractice award into its different components to determine whether it solely belongs to the spouse who wins it or to the couple. In those states, any portion of the award that constitutes lost income is considered marital property since the income it replaces would have been marital property. Likewise, the portion of the award that pays medical bills belongs to the couple. However, the portion of the award that compensates for loss of the spouse's well-being, like pain and suffering or physical disability, is the separate property of that spouse.

Mechanistic Approach

A minority of states look to the timing of the litigation and apply a mechanistic approach. If the spouse receives personal injury compensation during the marriage, any damage award or settlement is marital property, even that portion of it that compensates for a spouse's loss of well-being. A few equitable distribution states permit all property acquired by either spouse before the divorce, including property obtained before the marriage or by inheritance or gift, to be divided equitably between both spouses. For these particular states that also apply the mechanistic approach, inquiry into what is separate and what is marital property is not necessary.