07/14/2011 10:41 EDT | Updated 09/13/2011 05:12 EDT

Supreme Court Says Bankruptcy Divorce Loophole Needs To Be Closed

Flickr: Brian K YYZ

THE CANADIAN PRESS -- OTTAWA - 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 an unanimous decision, the court found that equalization payments agreed to as part of a divorce are considered debts, so are wiped off a person's balance sheet when they declare bankruptcy.

The case involved a Manitoba couple who had split and agreed on an equalization payment based on the value of the family farm.

The husband subsequently declared bankruptcy but was allowed to keep the farm and his ex-wife had argued unsuccessfully she should still receive the payment as a result.

While the Supreme Court noted the outcome appears unfair, the law as it stands is clear that such payments aren't protected.