Two may become one in marriage, but divorce divides everything back into two. Whether the settlement money from one spouse's personal injury case remains the property of that spouse or gets divided in a divorce depends on the laws of the state in which the couple resides.
Community Property States
States generally use one of two methods of dividing property in a divorce: community property division or equitable division. In community property states, property is divided into community property and separate property. All moneys earned by either spouse during the marriage are community property and divided equally between the two when they divorce. Any assets purchased with community property funds are also community assets and are divided equally. Property owned by a spouse before marriage is his separate property and awarded entirely to him on divorce.
Settlements in Community Property States
Most community property states analyze a personal injury or other court settlement to determine the losses for which the award compensated. For example, a settlement after an automobile accident could include moneys for lost wages and compensation for the person's pain and suffering. In most community property states, any money that compensates for wages lost during the marriage is community property. That is, the portion of the settlement for lost income is split equally between the divorcing spouses. Compensation for pain and suffering remains the separate property of the injured spouse.
Equitable Division States
In equitable division states, all property the couple acquires during a marriage is termed marital property. The only exceptions are gifts or inheritances received by one spouse, which are separate property. The court's job in equitable division states is to divide all property between the spouses fairly, rather than equally. If necessary for fairness, the court may even award one spouse a portion of the other spouse's separate property.
Settlements in Equitable Division States
Many equitable division states classify a settlement as marital property if it was received during the marriage. The courts reason that since all property other than gifts and inheritances received during the marriage is marital, a personal injury settlement received during the marriage is also marital property. That means the settlement is divided equitably between the spouses.
Specific State Statutes
Some states have specific laws designating personal injury settlements as either separate property or marital/community property. California, for example, classifies all settlements or awards from lawsuits as community property if the lawsuit was initiated during the marriage. In New York, on the other hand, all personal injury awards and settlements are separate property.