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Divorce and Personal Injury Settlement Funds

It may seem like common sense when thinking about what happens to a personal injury settlement when a married couple separates and files for a divorce.   Your initial thought may be that its marital property and you may have reached that conclusion for a variety of reasons. However, it is not quite that simple. North Carolina is an equitable distribution jurisdiction, which means that equal is fair unless there is evidence as to why all property should not be equally split between the spouses seeking the divorce. There are three different ways to categorize property after separation and in preparation for a divorce. The three categories are: marital, separate and divisible.

Marital property is self-explanatory. NCGS § 52-20(b)(1) defines marital property as all real and personal property that is acquired by one or both spouses during the marriage and before the date of separation. Marital property includes all vested and non-vested pension, retirement and other deferred compensation rights and vested and non-vested pensions. There is a presumption that all property acquired after the date of marriage and before the date of separation is marital property, unless the property is categorized under another classification under the statute.

NCGS § 52-20(b)(2) defines separate property as all real and personal property acquired by one spouse before marriage, or that is acquired by devise, descent or gift during the marriage. If one spouse gives the other spouse a gift during the marriage, the gift will be deemed marital property unless the intention for it to be separate property is stated in the conveyance of the property. Property that is acquired during a marriage in exchange for separate property remains separate property even if the acquired property is in the name of both spouses, unless a contrary intention of the property becoming marital property is expressly stated in the conveyance of the title.

NCGS § 52-20(b)(4) defines divisible property as all real and personal property that fall into one of the sub-categories as listed below:

  1. All appreciation and diminution of value of marital property and divisible property of the parties occurring after the date of separation and prior to the date of distribution, except for diminution or appreciation in value that is the result of post separation actions or activities of a spouse shall not be treated as divisible property.
  2. All property, property rights, or any portion thereof received after the date of separation but before the date of distribution that was acquired because of the efforts of either spouse during the marriage and before the date of separation, including, but not limited to, commissions, bonuses, and contractual rights.
  3. Passive income from marital property received after the date separation, including but not limited to, interest and dividends
  4. Passive increases and passive decreases in marital debt and financing charges and interest related to marital debt.

We are not family law attorneys, so we will not provide further context on divorce, however, it is important to have basic knowledge of the three classifications of property in the unfortunate event that you go through a divorce where settlement proceeds from a personal injury case or claim become an item of controversy. In such an event, if your spouse does not contest the settlement or law suit proceeds after you assess it as separate property not subject to equitable distribution, the property will can then only be marital or divisible. So, at this point you are probably wondering how you can figure that all. Every circumstance is different, but there are some North Carolina cases that address this issue and provide context as to how court makes its decision.

In Johnson v. Johnson, a husband and wife filed for a divorce and the court was faced with the question of whether proceeds representing a settlement recovered by a spouse upon a claim for his or her personal injuries sustained during the marriage of the of the parties is marital property that is subject to distribution upon dissolution of the marriage or whether the proceeds are separate property belonging to the injured spouse. Johnson v. Johnson, 317 N.C. 437, 346 S.E.2d 430 (1986). Id. The district court ruled that the injured husband’s proceeds were his separate property. Id. The wife appealed the decision. Id. The Court of Appeals affirmed the decision of the lower court and again ruled that the proceeds were the husband’s separate property. Id. Again, the wife appealed. Id. The Supreme Court held that the portion of the injured husband’s proceeds that represented his compensation for lost wages and medical bills was marital property, and that the portion that represented his personal suffering and disability was separate property, and not subject to equitable distribution. Id.

In Dunlap v. Dunlap, a husband and wife filed for a divorce. Dunlap v. Dunlap, 85 N.C. App. 324, 354 S.E.2d 734 (1987). The District Court determined that proceeds that both the husband and wife each received from separate personal injury claims during the marriage was marital property and thus eligible for equitable distribution. Id. The plaintiff-husband appealed the decision. Id. On appeal, the Court of Appeals determined that the issue of whether the settlement proceeds were marital property or not and required remand for the district court to determine if settlement proceeds to each spouse were compensation for pain, suffering, disability, disfigurement, loss of limbs, lost earning capacity and whether the non-injured spouse was compensated for loss of service or loss of consortium. Id. In making this determination the court referenced the Johnson decision, particularly the analytical approach that was taken, which is as follows:


[b]ecause each element of recovery comprising [a personal injury settlement] must necessarily compensate for loss of, or injury to, the injured spouse's separate property, or the non-injured spouse's separate property, or the marital property of the spouses, any portion of the [personal injury settlement] not proved by a preponderance of the evidence to compensate for loss to a spouse's separate property must, necessarily, fall into the category of “marital property.” Therefore, to the extent that the parties fail to prove that the [personal injury settlement] compensates for injury to separate property and is therefore properly classified as separate property in the amounts proved, the proceeds of the [injured spouse's] personal injury [settlement] shall be classified as marital property [footnote omitted] and subject to distribution according to N.C.G.S. § 50-20. Id. at 327-28.

We invite you to contact us to discuss your case.  You will speak directly with a personal injury attorney who can discuss your rights and how we can help you.  We can be reached at (704) 714-1450.

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