What happens to your money from a personal injury award or settlement, when you divorce? The short answer is, "It depends." It depends on whether you live in a community-property or equitable distribution state. It depends on how the money was allocated in the award or settlement. It depends on the date of the accident, the date of your separation or the date of your divorce. How the money is divided up depends on how the court in your state will approach the analysis based upon the specific details of your case.
The various scenarios go something like this:
1. Husband and Wife have been married for eight years and have three young children. Wife suffered a significant delay in diagnosis of her breast cancer, when her mammography studies were misread. By the time she was finally was diagnosed, the cancer had spread throughout her body, and she was forced to take a leave of absence from her job to undergo chemotherapy and radiation treatments. During this time, Wife was unable to care for herself or her family, and Husband was trying to hold down his job and care for his family. Husband and Wife contacted an attorney regarding a medical malpractice case, and suit was filed against the doctor, who misread the mammography study. The claim included damages to the Wife, as well as a loss of consortium claim for the Husband. During the pendency of the litigation, Husband and Wife decided to divorce. Question: What happens to any proceeds acquired from the lawsuit?
2. Husband is in a car accident and suffers a broken leg and arm. He files a motor vehicle accident claim against the other driver, who was responsible for the accident, in order to recover money for his personal and property damages. Shortly following the accident, Husband and Wife, who had been contemplating separation for a number of months, decide to divorce. Question: What happens to any proceeds acquired from the lawsuit?
3. Husband and Wife have filed a medical malpractice lawsuit against a Hospital, where their minor child suffered brain damage, when during a routine operative procedure, the child's airway was lost. Mom, Dad and minor child are awarded multiple millions of dollars, which are deposited into two bank accounts: (1) For the benefit of minor child; and (2) Joint bank account for Mom and Dad. Question: Are all or part of the proceeds from the lawsuit subject to equitable distribution, when Husband and Wife divorce?
How a personal injury award or settlement is treated in the context of divorce is highly fact-dependent. Each of the above scenarios varies slightly from the other, and may result in differing arguments as to why (or why not) the money should (or should not) be treated as a marital asset. Some of the criteria for consideration may include an analysis of the damages themselves, for example, whether the damages were for pain and suffering, lost wages, loss of companionship, or damages to property. There are a number of different approaches to distinguishing personal injury settlements or awards as marital versus non-marital assets. These approaches are also considered in the context of whether the divorcing couple resides in either a community property state (such as California) or equitable distribution state(such as Florida or New York.) For example, some courts have taken a very straight-line approach, treating any personal injury award or settlement as "personal," belonging solely to the individual injured spouse as non-marital, not subject to division in divorce. Some courts, on the other hand, have taken a more analytical approach by separating each and every element of a particular damage, and assessing whether it should fall into a non-marital or marital asset category. This meticulous approach gives significant weight to fairness of the division of property. Finally, some courts take a more simplistic approach to the problem, deeming any personal injury award or settlement as a marital asset if acquired during the marriage, regardless of the nature of the damages.
Where does this leave you?
3 Ways You Can Protect Your Personal Injury Award or Settlement from Your Divorce
1. Specifically allocate the damages claimed to distinguish what is "personal" versus "marital;"
2. Advise your personal injury attorney early-on regarding the likelihood of divorce and the need to engage or consult with a family lawyer regarding the rules in your state; and
3. Maintain an individual, separate bank account to deposit any proceeds and do not comingle those assets until issues of equitable distribution are resolved.