By: Rabbi Ari Enkin / As a general rule, one who declares bankruptcy is then exempt from having to pay back any outstanding debts. Ever. While deals and agreements are often made in which the debtor pays back a portion of what he owes, this too may not be truly required. Although halacha does not include a bankruptcy clause of its own, especially not one which inherently frees one from debt, it does seem to accept most...

Back From Bankruptcy

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By: Rabbi Ari Enkin

As a general rule, one who declares bankruptcy is then exempt from having to pay back any outstanding debts. Ever. While deals and agreements are often made in which the debtor pays back a portion of what he owes, this too may not be truly required. Although halacha does not include a bankruptcy clause of its own, especially not one which inherently frees one from debt, it does seem to accept most of the legal consequences of bankruptcy law.

What is not completely clear, however, is if one who declares bankruptcy and later becomes wealthy will be required to repay the debts from his “previous life”. Are those who previously agreed at the time of bankruptcy to accept only a portion of what they were owed entitled to later sue for the remaining monies? (Note: This essay only relates to a situation where a person who declared bankruptcy was truly penniless at the time. It does not apply to a person who declared bankruptcy but remained financially secure from other sources). 

Although not unanimous, most halachic authorities seem to rule that bankruptcy is final and the debtor will not be required to pay back past debts should he become wealthy later on. This is especially true if all the closing financial agreements were made in accordance with halacha, such as by means of an official kinyan and the like. It goes without saying, of course, that all such settlements and proceedings must be carried out in accordance with civil law (“dina demalchuta dina”), as well.[1] All the above is true because halacha accepts the authority of business practices that are governed by the civil authorities as well as common custom.[2] As such, one who chooses to engage in trade, commerce, and other business pursuits implies an acceptance of all the rules and regulations that govern it, including the bankruptcy clause.[3]

Furthermore, some authorities maintain that once a lender has despaired of being paid back (“ye’ush”) there is no obligation to do so even if one will later have the money to do so.[4] Nevertheless, from the perspective of middas chassidus and peshara, it is very meritorious to make an effort to offer some form of compensation and appeasement to one’s creditors. Our sages teach that repaying one’s debts is a moral obligation.[5] 

A number of authorities disagree, however, and rule that a debtor will be required to pay back all outstanding debts should he have the means to do so at a later date. According to this approach, the clause of dina d’malchuta dina is not applicable to this aspect of bankruptcy, nor does it ever apply to erase debts and loans between Jews.[6] It is further noted that creditors do not truly forgive monies owed to them when a debtor goes bankrupt – they merely take for themselves whatever they can. They never truly waive the right to claim their money in the future.[7] 

It goes without saying, of course, that one who plans his “bankruptcy” simply in order to evade debts and responsibilities, with the intention of soon returning under a different name, is nothing but a swindler and a thief. In such a situation proceedings can and should be taken against such an individual when he returns from his “bankruptcy”.[8] All of the above applies only to debts accrued during the course of business and generally only in transaction between registered companies and corporations. A personal loan must always be paid back regardless of all other considerations and halacha does not recognize a declaration of bankruptcy to exempt one from paying it back.[9]

 


[1] Avnei Tzedek, CM 2; Chatam Sofer, CM 44; Beit Yitzchak, YD 2:75:5; B’tzel Hachachma 3:124; Minchat Elazar 3:31. See also: Igrot Moshe, CM 1:72.

[2] CM 201.

[3] Rashba 2:268; Pitchei Choshen Chapter 12.

[4] CM 163:3; Teshuvot V’hanhagot 2:701; Imrei Bina 2:4 (geviat chov).

[5]  Ketubot 86a with Rashi; Ramban, to Baba Batra 174a; Minchat Chinuch 259 Ahavat Chessed 2:24.

[6]  Chavatzelet Hasharon 81; Chelkat Yaakov 3:160.

[7]  CM 98:1, 262:5; Chacham Tzvi 144; Minchat Yitzchak 3:134.

[8] B’tzel Hachachma 5:114.

[9] Pitchei Choshen Chapter 12

About Ari Enkin

Rabbi Ari N. Enkin, a resident of Ramat Beit Shemesh, is a researcher and writer of contemporary halachic issues. He is the author of the “Dalet Amot of Halacha” series (8 volumes), Rabbinic Director of United with Israel and a RA"M at a number of yeshivot. www.rabbienkin.com

16 comments

  1. “It goes without saying, of course, that one who plans his “bankruptcy” simply in order to evade debts and responsibilities, with the intention of soon returning under a different name, is nothing but a swindler and a thief.”

    I don’t know what this means. The idea of bankruptcy is exactly that; to give someone an opportunity to start over (e.g., return under a different name). In general, I think this entire post is extremely unclear; it mixes the civil concept of bankriptcy with halacha, without expalining if there is a halachic concept of bankruptcy and shows a poor understanding of bankruptcy as it’s practiced in the US.

  2. Dear Joseph-

    Thank you for your feedback.

    It’s true. I know nothing about bankruptcy other than what Ive gleaned by osmosis and from the texts I encoutered preparing this post.

    However,re: “without expalining if there is a halachic concept of bankruptcy”

    I do think I made that clear in the first paragraph. Halacha does not include a bankruptcy clause. And yes, this post “mixes the civil concept of bankriptcy with halacha” – which is exactly what I was trying to do.

    Maybe you’re right, but I find it hard ot beleive that one can declare bankruptcy simply in order to evade debts and responsibilities in order to “start over”. Something doesnt feel right.

    Ari Enkin

  3. Well, one has to be careful about commercial transactions. Halacha recognizes that commercial transactions, unless otherwise specified, are entered into according to the customs of the market place (as you pointed out). For a commercial loan in the US it means that the lender will have figured some risk of bankruptcy into the interest rate,and it would seem that a civil bankruptcy would discharge the loan in halacha as well.

    A personal loan to help out a fellow Jew in need is another matter entirely, and I doubt that a civil bankruptcy will void the halachic requirement to repay the debt. (Although of course absent a prozbul, shmitta would)

  4. If your debts exceed your assets you can declare bankruptcy. (That’s a bit oversimplified, of course, but it’s the general idea.) That doesn’t mean, however, the bankrupt evades its debts and responsibilities since its assets (with certain items protected) are used to pay off a portion of the debts (depending on teh ratio of assets to debts). Then the bankrupt has a clean slate and can start over again. And that’s the idea; to give people the opportunity to start over and not be engulfed in debt your whole life because of one bad business or unexpected catastrophic medical expenses or the like. Obligating a bankrupt to pay back debts afterwards would negate this whole idea. That’s why the mixing of civil bankruptcy law and halacha make things unclear since halacha, apparently, doesn’t have this concept. That’s one of the things I found confusing.

  5. There are two good articles on this topic available on the internet by two rabbis who are also law professors:

    http://www.jlaw.com/Articles/bank.html

    http://www.jlaw.com/Articles/bankruptcy.html

  6. I agree with Joseph Kaplan that the post is unclear and also shows a definite misunderstanding of (at least) US legal norms and bankruptcy law. I think that the Hirhurim reading audience (many of whom probably have studied choshen mishpat type issues with a practical perspective and many of whom are lawyers or sophisticated business professionals) would be better served if this entry were withdrawn until it could be clarified or at least expanded to explain what is meant by Bankruptcy and the whether or not it matters who is legally the obligor.

    I think the following topics would need to be addressed:

    *The status of a loan to a partnership, corporation, or company or other entity — whether closely held, widely held and whether or not personally guaranteed.

    Same as above for a creditor.

    *The fact that under American bankruptcy law it is a violation of the law for a creditor to to dry to collect a debt that extinguished in bankruptcy.

    In particular, I think you need to read some general bankruptcy resources to understand that the purposes of bankruptcy is, in fact, to allow the debtor a fresh start. The debtor turns over all assets to creditors (similar to what would happened if he were to have died) and can begin again –absent particular debts the law preserves.

    I also think we would need to understand when an individual would be responsible for the debts of an entity he or she owns, absent a guarantee.

    I don’t mean to be critical, and I regret not commenting to say “great job” on the posts that I find very enjoyable and informative but this post is not your best work. I am only holding you to the high standard that you have set. You have done far more for us readers than we have done for you.

  7. Natan-

    Thanks for that. I never hesitate to go back to the ‘drawing board’ and I will.

    That being said, although I acknowledge that I know nothing about bankruptcy law, I do know that outstanding debts are erased.

    Whether or not *THAT ASPECT* of bankruptcy law is legitimate accroding to halacha is the primary subject of this post, which presents a survey of the prominent sources. As such, I would like to think that the post, even as is, does serve a prupose.

    ….I will be reviewing the links that Scott provided, above. 😉

    Ari Enkin

    Ari Enkin

  8. Ok, looking forward to the update. I think that I would very much appreciate an explanation of the following statement you made: “All of the above applies only to debts accrued during the course of business and generally only in transaction between registered companies and corporations.”

    If the loan was made to a company, why would the owner (absent an explicit guarantee by the company’s owners) be liable if the owner was not liable under civil law. Wouldn’t the civil law corporate shield be respected for halacha absent a personal hischayvus? If that is the case then your whole shakel vtaryah would seem to be inapplicable to many commercial transactions. (Unless you think that al pi halacha the entity’s chov continues post-bankruptcy).

  9. Natan,

    The halacha, however, recognizes a variety of obligations that one has to pay, where the person owed the obligation has no recourse for collection. For example, if one damages a fellows object in a way that is not visible (e.g. treif up his dishes) the one who did the damage is required to pay, but a beis din cannot enforce the obligation. This is generally under the rubrick of “l’tzeit yidei shamayim.” That is, there is a mitzvah on the person to pay up, but there is no enforceable obligation or ability to collect. A personal loan after bankruptcy, it seems to me, might fall under this category.

  10. Natan-

    Re: “If the loan was made to a company, why would the owner (absent an explicit guarantee by the company’s owners) be liable if the owner was not liable under civil law.”

    If I understand what you are asking — this is the subject of the second-to-last-paragraph of my post where sources are cited that would still obligate the owner notwithstading civil law.

    Ari Enkin

  11. R’ Enkin:

    I don’t think you understand Natan’s question. As I understand it, he’s asking about a situation where a corporation (which in the US is considered a legal person) borrows money and then goes bankrupt. Unless an individual (e.g., the major shareholder) personally guaranteed payment of the loan, no individual is liable for that debt, only the corporation. Therefore, once the corporation is discharged from bankruptcy, no one is obligated to pay whatever remains unpaid. Youe second-to-last paragraph doesn’t discuss the corporation/individual issue which was, I think, the crux of Natan’s question.

  12. R’ Enkin

    With all due respect, this post is a mess. It would be like me writing about the legal implications of nuclear fission when I know virtually nothing about nuclear fission. IMVHO, You should withdraw it. Your assumptions about bankruptcy law and what it accomplishes are very simplistic (and generally incorrect); the reality is much more complex and nuanced.

  13. MiMedinat HaYam

    to simplify matters — halacha recognized that a person doesnt have money to pay his debts. short of becoming an eved ivri (not today; and with today’s numbers, it prob wouldnt pay too much to creditors — what happens then; theoretical question, of course; so dont go around saying i advocate eved ivri), the creditor(s) must wait, but betdin will arrange a payment plan, over many years, whatever. call that a form of receivership.

    subject to pruzbul, etc.

    quyestuiioon remains regarding corporate bankruptxcy, and halachic non recognituion of corporations (igrot moshe)

  14. Azriel-

    As I have already mentioned several times — I am well aware of the problems of this post.

    But delete it?! Why would I do that? I am more than pleased that readers are teaching me a thing or two! I am so happy that Scott sent me those links, above, as well as the other valuable feedback. By all means — keep those constructive critisims coming!

    I am going to use everyone’s feedback to perfect the hardcopy verison of this post (in preparation for a new sefer). Deleting it would only deprive me of this opportunity.

    Ari Enkin

  15. Glad to be of assistance.

  16. MiMedinat HaYam

    for a better story (and more publicity for your book) tackle the madoff / mets question.

    since you arent in the states, a brief synopsis:

    the madoff trustee / sec / govt is seeking to “claw back” proceeds (however defined originally — principal or return on investment) from those who received proceeds over the past three (or was it six — does it make a difference? years) claiming it was improper or fictitious investment income (as opposed to return of principal, but it seems sometimes to be return of principal) and also claiming these already or partially paid were in on the “scam” and knew or should have known it was a scam. the particular case involves the wilpon family, owner of the ny mets baseball team, hence the name madoff / mets case.

    in my opinion, its a case of “hamotzie me’chavero alav ha’rayah”, but one may say otherwise. at least the trustee says otherwise.

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