The Government has been challenged over the case of an 83-year-old farmer facing a £30,000 legal bill after being cleared of shooting a suspected thief on his land.
Peers at Westminster heard the situation was "ridiculous" and would deter innocent people defending themselves.
The criticism of the system, described as "straight out of Alice in Wonderland", came after Kenneth Hugill was recently found not guilty of grievous bodily harm at Hull Crown Court.
Mr Hugill shot Richard Stables in the foot when he fired his shotgun in the dark towards a car he believed was going to run him over on his isolated farm in Wilberfoss, East Yorkshire.
He walked free from court last week but his son David revealed the family had been left with legal costs of at least £30,000.
A fundraising page has now been set up to help pay the bill.
Mr Hugill's case was raised at Westminster by Tory peer Lord Kirkhope of Harrogate, who said despite being acquitted, the pensioner was unable to claim his reasonable defence costs.
Lord Kirkhope said: "How can we reconcile the presumption of innocence and an acquittal with the fact that claiming legal costs incurred to maintain innocence is no longer normally possible."
He asked for the case to be considered as part of a current review of the rules.
He said: "Bearing in mind that the present situation is not only a deterrent to innocent parties defending themselves, but it's also a positive encouragement to sloppy preparation and decision-taking by the prosecuting authorities."
Responding for the Government, Lord Keen of Elie said Mr Hugill had been eligible for legal aid, but declined it.
The Tory frontbencher said: "Had he accepted the offer of legal aid, he would have been required to make a relatively modest contribution. He would have been able to recover that contribution upon being acquitted.
"However, the individual in question decided not to accept the offer of legal aid and instead instructed lawyers privately.
"In those circumstances, he was not eligible for recovery of costs."
However, he said all the issues raised would be looked at by the review, due to be completed by April next year.
Liberal Democrat peer Lord Marks of Henley-on-Thames said the regulations covering the claiming of costs were "straight out of Alice in Wonderland".
He said: "If you are financially ineligible for legal aid, you must nevertheless apply for legal aid in order to get a determination that you are not eligible for it. Only then can you get your costs if you are acquitted and then only at legal aid rates."
Lord Marks added: "Will he assure us that there will be changes in this absurd regime under the review?"
Lord Keen said: "Clearly it is not possible to determine your eligibility for legal aid unless you apply for it.
"It is a relatively straightforward scheme."
Lord Deben, the Tory former Cabinet minister John Gummer, branded the situation faced by Mr Hugill as "ridiculous".
He said: "The reason it's ridiculous is because it is very hard to explain to people who have been prosecuted and who turn out to be entirely innocent ... that they can't claim their costs.
"If people are innocent until proved guilty, not being being able to claim your costs against people who have inconvenienced you ... doesn't sound to ordinary people like justice."
Lord Keen said: "The individual in question was offered legal aid, having been eligible for legal aid, and had he accepted that offer, he would have recovered his costs."