Divorce and Personal Injury Settlements: What Happens to Your Compensation?

When a marriage ends in divorce, dividing assets can be complex. Understanding whether this compensation is considered marital property in Ontario is crucial if you’ve received a personal injury settlement during your marriage. 

Personal injury settlements represent essential financial support for many individuals following a significant accident or injury. However, what happens to these settlements in the event of a divorce?

This article will explain the legal landscape surrounding divorce and personal injury settlements, clarifying whether compensation could be subject to division and what protections are in place to ensure it remains yours.

Is a personal injury settlement marital property?

In Ontario, the general rule for dividing property upon divorce is that marital property is shared equally between spouses. That includes assets and debts acquired during the marriage, from family homes to retirement accounts. However, not all property falls under this category. Personal injury settlements are a notable exception—sometimes.

A personal injury settlement reimburses the victim for their losses. Because these funds are meant to address personal damages, they are often treated as personal rather than marital property. However, specific rules apply depending on how the settlement is categorized and used throughout the marriage.

Awards or settlements for pain and suffering or future medical expenses generally stay with the injured spouse. However, if any part of the settlement has been used for joint expenses—such as purchasing a shared home or funding a family vacation—the court may consider those portions as marital property and subject to division.

How Courts Determine Whether a Settlement Is Divisible

The Ontario courts look closely at how personal injury settlement funds are allocated and used. The two primary components of a settlement that courts consider are:

• Compensation for Pain and Suffering: Money allocated for pain and suffering is personal and typically excluded from division. This category recognizes the emotional and physical distress caused by the injury, meaning it is intended solely for the injured spouse.
• Compensation for Lost Income and Medical Bills: While these funds are generally considered personal property if used to support joint expenses during the marriage, courts may view that portion of the settlement as shared. That is especially relevant if the money was used for a joint mortgage, family vacation, or to pay bills for both spouses.

If a personal injury settlement remains untouched and separate, the likelihood that it will be treated as personal property is much higher. However, suppose the funds were blended with other joint finances or used for the benefit of both spouses. In that case, the court may rule that part of the settlement should be divided.

Protecting Your Personal Injury Settlement in Divorce

Safeguarding these funds during a divorce can be a critical concern for people who have received a personal injury settlement. Fortunately, there are legal ways to protect this compensation.

One option is to enter into a prenuptial or postnuptial agreement. These legal documents allow couples to clarify the ownership of certain assets, including personal injury settlements. A prenuptial agreement can ensure that a personal injury settlement is categorized as personal property and remains with the injured spouse during a divorce.

For those considering this option, this guide on prenuptial agreements in Ontario offers valuable insights into the benefits and process involved in drafting such agreements.

Keeping personal injury settlements separate from joint accounts or assets is also important. By maintaining the settlement in a separate account and not using the funds for shared purchases or expenses, you can better argue that the money should remain personal property in the event of a divorce. Additionally, detailed records of how settlement funds are spent will help ensure that the court accurately assesses which parts of the settlement remain personal.

Exceptions to the Rule: When a Settlement May Be Divisible

While personal injury settlements generally remain with the injured spouse, there are certain exceptions where the court may order a portion of the settlement to be shared. One key exception is if the injured spouse dies, and the surviving spouse claims the settlement as part of the estate. In such cases, depending on the details of the will and estate planning, some funds may be available to the surviving spouse.

Another exception arises when the funds from the settlement have been used to enhance shared assets. For example, suppose part of a settlement is used to renovate the family home or make a significant purchase. In that case, courts may consider that portion of the settlement to be marital property. That makes it vital for couples to carefully manage how personal injury settlements are handled to prevent the unintended sharing of funds.

Planning for Financial Protection

If you anticipate a divorce, planning ahead is key to protecting your personal injury settlement. Clear documentation of how your settlement has been used throughout the marriage will make it easier to demonstrate its personal nature. If your settlement has been kept separate and not spent on joint expenses, you will have a stronger case for retaining the funds.

Consulting a family lawyer is essential for those who have yet to receive a personal injury settlement but want to prepare for potential future circumstances. A family lawyer can draft an agreement or give advice on managing future settlements.

Safeguarding Your Financial Future

Divorce can bring uncertainty, especially when it comes to dividing assets. While often considered personal property, personal injury settlements can still be scrutinized during divorce proceedings, especially if they have been used for joint purposes. Understanding the law, keeping detailed records, and considering entering into legal agreements like a prenuptial or postnuptial arrangement to protect your settlement. By taking these steps, you can ensure that your personal injury compensation remains where it belongs—with you.