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Shabbat Parashat Toldot 5780

Ask the Rabbi: Bankruptcy in Halacha part II

Rav Daniel Mann

Question: I have $30,000 of credit debt (in the US). I lost my job, and my new job pays less. I do not see how I can pay the debt. What does Jewish law say about filing for bankruptcy?

 

Answer: [We responded to the querier regarding his situation but are broadening (in brevity) the discussion. Last time we saw reasons for and against accepting the discharge of debt even though the original halacha disallows it. This time, we will explore practical issues including distinctions between cases. We cannot cover all elements and cases.]

Poskim are quite lenient regarding debts owed by corporations. The Pitchei Choshen (Halva’ah 2:(63)) says that all agree that in doing business with a corporation, which are defined by corporate laws, people expect that the law of the land will govern, even if the owners and officers are religious Jews. This obviously applies to investors in a corporation, but it also should apply to suppliers and even workers. When an individual owes money to a financial institution (e.g., banks, credit card companies), the laws of bankruptcy apply. After all, they plan based on the expectation that a percentage of their debtors will go bankrupt, and they factor this is when setting interest rates. Bankruptcy is valid in regard to corporate as well as non-Jewish creditors, since the governing law in their regard is the law of the land.

The matter is more complicated when an individual Jew lends money to another Jew, especially based on the latter’s need (see more on this distinction in Chelkat Yaakov, Choshen Mishpat 32) supplies goods to him on credit, or employs him. (When a creditor has a connection to the debtor or is a charitable person and can afford it, he could decide to forgive the money and count it as tzedaka, but that is his decision. We should also remember that the idea of forgiving debt is not foreign to Judaism, as according to Torah law, every seven years, debt is forgiven. When this is practically applicable is beyond our present scope.) If the one who is owed money did not make actuarial calculations and reasonably believed the debtor felt obligated to pay his debt, the matter of acting based on local practice is not so applicable. It is also unclear if the law, whose rationale is most societally compelling for growing the economy, is justified to contradict Torah law regarding personal consumer debt. Also, often a debtor knows he will be able to pay, just with difficulty. It is possible that the hardship of paying is not much greater than the hardship of loss to the creditor, and there are not moral grounds to not fulfill one’s obligation. If an individual debtor fully regains his ability to pay, it is morally correct to pay his fellow individual even if bankruptcy law does not require it.

Bankruptcy applies in regard to all of one’s creditors. During the process, one is forbidden to pay creditors selectively; the court dictates payment. Therefore, if one has a moral right to file for bankruptcy due to corporate debt, the loss to the individual creditor is a necessary casualty, at least initially. However, nothing legally prevents the debtor, after the receiver takes assets as instructed by the court, from paying those to whom he feels a higher moral obligation, which he should do as possible. (It can be difficult to deal with a case in which there are multiple such creditors and insufficient funds for them all.)

        Bankruptcy is an important tool of survival for an honest debtor. Unfortunately, some abuse the right, sometimes illegally by deceiving the court in a variety of ways. Even without deception, not every bankruptcy filing is halachically or ethically proper, and this can often create a chillul Hashem as well. These factors should play a major role in determining whether bankruptcy is called for. Therefore, one who is considering filing should not only consider its impact on his financial future and discuss legality and process with a competent and ethical lawyer, but it is proper to also discuss the details with a rabbi or other moral advisor.  
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