The Supreme Court of Canada has urged Parliament to amend bankruptcy legislation to better protect spouses seeking divorce settlements.

Bankruptcy law and family law remain “at cross-purposes,” the court said Thursday in ruling unanimously that a Manitoba man need not compensate his ex-wife for a share of the farm they owned because he went bankrupt.

The Schreyer vs. Schreyer ruling has “serious implications” because it continues to leave ex-spouses vulnerable in cases where their former partner declares bankruptcy, says veteran divorce lawyer Philip Epstein.

He estimates that happens in about five per cent of divorce cases.

“It’s often a threat that parties make: ‘If you don’t accept my offer, I’m going to go bankrupt,’” Epstein said. “It can be a worry in divorce settlements because the bankruptcy laws and family laws are incompatible.”

The court ruling dismissed the appeal of Susan Schreyer, who separated from her husband Anthony in 1999 after almost 20 years of marriage.

While the two had agreed to an equalization payment of about $41,000 for her share of their assets, her ex-husband declared bankruptcy.

Under bankruptcy laws, her claim was terminated, despite the fact her ex-husband didn’t actually lose the property because farms, like pensions, are exempt from seizure.

The ex-wife claimed she didn’t know her ex-husband had filed for bankruptcy, so didn’t use available legal avenues to ensure her stake was protected.

As a result, he got the farm and lower courts ruled she was owed nothing.

“I do not doubt that an outcome like the one in this appeal looks unfair, given that the appellant’s equalization claim was based primarily on the value of an asset — the farm property — which was exempt from bankruptcy and therefore not accessible to other creditors,” wrote Justice Louis LeBel.

“Parliament could amend the (Bankruptcy and Insolvency Act) in respect of the effect of a bankruptcy’s discharge on equalization claims and exempt assets. But the absence of such an amendment makes the outcome of this case unavoidable.”

Bankruptcy law does not allow ex-spouses to avoid payments such as alimony and child support.

LeBel pointed out that a 2003 Senate committee recommend the act be amended.

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“It seems to me that this matter is ripe for legislative attention so as to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes.”

With files from The Canadian Press