Divorce & Lawsuit Judgment Funds

by Beverly Bird
Sharing lawsuit proceeds depends on when the cause of action occurred.

Sharing lawsuit proceeds depends on when the cause of action occurred.

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One of the pivotal issues of property division in divorce is whether each asset is a spouse's separate property or if it's marital property. When an asset is determined to be separate property, it's not subject to distribution in most states. But if it's marital property, the issue becomes how much of its value each spouse should receive. This depends on whether your state follows community property law or equitable distribution law. The rules of divorce differ considerably across state lines, and this also applies to the proceeds of a spouse's lawsuit.

Nature of the Loss

The majority of states use the analytic approach when deciding distribution of lawsuit proceeds in a divorce. This means that the court will attempt to determine whether judgment funds were intended to compensate the couple as a whole, or just the spouse who was the litigant in the lawsuit. For example, awards for pain and suffering are typically assigned to the injured spouse, whereas awards for lost wages compensate the marriage. The portion of lawsuit proceeds intended to compensate the marriage is usually divisible between the spouses in a divorce. Portions that compensate one spouse solely usually remain his separate property.

Marital Funds

A few states don't bother trying to determine exactly what losses a lawsuit's proceeds are intended to address. This is the mechanistic approach, and it declares that judgment funds are entirely and without question marital property. Whether each spouse receives 50 percent of the judgment amount depends on whether they're divorcing in an equitable distribution state or a community property state. In an equitable distribution state, marital property is apportioned in a way that seems fair to both parties after the judge takes a variety of circumstances into consideration. Community property states normally divide marital assets 50-50, but this can be less clear cut when it comes to funds resulting from a lawsuit. For example, California is a community property state, but it takes an approach to such assets that's very similar to equitable distribution law. The spouse receiving the funds won't receive less than half, but he might receive more, depending on factors specific to the marriage. For example, if the other spouse invested time and money into nursing the injured spouse back to health, she might be compensated with fully half of the proceeds. Otherwise, the divorce court can award her much less.

Separate Property

Occasionally, courts use something called a unitary approach to dividing lawsuit proceeds in a divorce. According to this method, judgment funds belong solely to the spouse who received them. They're his separate property, even if the lawsuit accrued and the legal claim was made during the marriage. However, this approach is unusual.

Date of the Claim

Before deciding what approach to use when dividing lawsuit judgment proceeds – and if so, in what percentages -- courts must first ascertain the date of the claim. If this date occurs prior to the marriage or after the date of separation, the funds aren't divisible regardless of what approach the state uses. They are the injured spouse's separate property, regardless of when the money was actually received. For example, if you sued for injuries in May, got married in October and received a judgment award the following year, the award is separate property because you weren't married at the time the cause of action for your claim occurred.