May a Jew escape debt by declaring bankruptcy?

Declaring bankruptcy is a morally complex action since it allows one to delay or avoid paying money rightfully owed to others. At the same time, it prevents debtors from being abused or taken advantage of by their creditors.

Modern bankruptcy statutes usually aim to protect the debtor while still recompensing creditors (at least partially). Yet some countries, including the United States, have recently enacted stricter bankruptcy laws to prevent fraudulent claims and repeat offenders. This attempt to protect both debtors and creditors is also found in classical Jewish law, albeit in a different manner.

The Torah commends extending loans to others (Exodus 22:24), and when poor people are the recipients, lending is deemed greater than charity since it allows people to make their own money, without causing embarrassment (Sefer Hamitzvot Aseh 197). The Torah prohibits taking essential possessions as collateral, and further proscribes lenders from demanding the return of a loan if they know that the borrower cannot currently repay it (CM 97:2). According to biblical law, loans (to poor and rich alike) may not be made with interest, and are relinquished at the end of the seven-year shmita cycle (Deuteronomy 15:2).

To encourage people to lend money, however, decisors allowed arrangements known as heter iska and pruzbul, which enable circumvention of these regulations, even as halachists encourage people to maintain the magnanimous spirit of the laws. To minimize disputes, the Sages demanded witnessing or documentation for all loans, even when performed between honest friends (Baba Metzia 75b).

While stressing the importance of lending money, Jewish law absolutely obligates debtors to repay their creditors (Rashi, Ketubot 96a), and failure to do so when possible violates biblical law (Ahavat Hessed 2:24). Borrowers should use all their assets to repay loans, even as certain properties, such as food and tools of trade, are protected from debt collection (CM 97:23-24). Recalcitrant debtors are referred to the local courts, which can seize property, sometimes with force (CM 97:6, 15).

When money is owed for reasons other than a loan – including wages and damages – the creditor himself may seize property nonviolently on condition that he immediately justify his claim to a court (CM 97:14). Yet debtors may not be subject to involuntary servitude to repay loans (97:15), since biblical law only allowed such action in the case of theft (Exodus 22:2).

Still, it is clear that the borrower has no mechanism to unilaterally discharge his debt, which remains in perpetuity. Most authorities believe this to be true even if the lender despairs of being repaid (CM 98:1). As Prof.

Steven Resnicoff has shown (JHCS 24), modern- day authorities question whether Halacha permits using the recourse of bankruptcy (through liquidation or reorganization) to avoid returning money, especially when the litigants desire to organize their business affairs according to Halacha.

Bankruptcy agreements regularly force creditors to settle against their will for partial payment.

Rabbi Bezalel Stern (d. 1989) ruled that Halacha does not recognize such arrangements, and that a creditor can still demand the rest of his money (Betzel Hochma 3:124).

Others, however, cite two halachic principles that might justify bankruptcy arrangements.

The first is dina demalchuta dina, the talmudic principle that creates an obligation to follow local monetary regulations. While some authorities applied this notion only to matters directly pertaining to government finances (Beit Yosef CM 369), others, including Rabbi Moshe Isserles, applied it more broadly to all matters of civil regulation (CM 369:11).

Rabbi Moshe Feinstein, among others, accepted this broader definition, and ostensibly accepted the bankruptcy arrangement made in a case involving a Swiss corporation (Igrot Moshe CM 2:62).

Yet one might contend that corporate bankruptcy is unique, since corporations are creations of civil law and, by definition, must function according to civil regulation (Pit’hei Hoshen, Halva’a, Chapter 2). Others have further contended, more generally, that the dina demalchuta principle does not apply when the civil law violates Halacha, as it does here by discharging the debt (Shach CM 73:39).

This latter problem, however, might be circumvented by a second halachic principle known as minhag sohrim (merchants’ practice), which asserts that contractors informally condition their agreement according to the established commercial practice. One may assume, especially if the loan documents were drawn up in compliance with local regulations, that the lender understood that the borrower would have the right, if necessary, to declare bankruptcy. Rabbi Ezra Basri has noted (Dinei Mamonot, Vol. 1) a precedent in a 16th-century responsum that forced objecting lenders to agree to a discharge agreement made with the majority of creditors in accordance with customary practice (Maharshach 2:13, 3:8). It would appear, however, that this dispensation applies only to genuinely impoverished debtors, and not to wealthy individuals seeking to shirk their biblical obligations and moral debt through the veil of bankruptcy.

The writer, online editor of Tradition and its blog, Text & Texture (text.rcarabbis.org), teaches at Yeshivat Hakotel.

JPostRabbi@yahoo.com