The Supreme Court of Canada has left open a legal loophole that could see spouses get out of paying divorce settlements with a strategic claim of bankruptcy.
But the top court says Parliament needs to act to close the gap.
In a unanimous decision, the court upheld defining equalization payments as debts, meaning they are wiped off a person's slate on a declaration of bankruptcy.
It also means an ex-spouse owed such a payment can no longer receive it.
Equalization is a system of evening out the net worth of couples by placing a dollar value on their assets and having the spouse worth more compensate the one worth less. Not every province uses this system; others physically divide the actual assets.
The case of Schreyer vs. Schreyer involved a Manitoba couple who separated in 1999. The evaluation of their assets wasn't completed until 2007, when the court decided she was owed $41,063.48 on the basis of the value of the family farm.
But in 2002, while the nuts-and-bolts of the Schreyers' deal were being hammered out, the husband had declared bankruptcy.
Some assets ó such as family farms and pensions ó are protected in bankruptcy, so someone officially declared bankrupt could still be worth money.
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 her equalization payment was deemed by lower courts to be worth 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 ó the farm property ó 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."....... (continued)
So for all you currently in the middle of a divorce, you better act fast and file for bankruptcy as soon as possible before they fix this