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The Bankrupt Borrower


Written by the rabbi


The Bankrupt Borrower
Mr. Gomel Chessed shares with his rav, Rav Chacham, the following predicament: "I loaned someone money, and I did not hassle him for payment when he told me that things were tough. Recently, I contacted him to ask if he is in any position to pay back. He replied that he was forced into bankruptcy and thereby absolved all his debts. Does he, indeed, no longer owe me for the loan?"

Gomels rav explains that although the Gemara and the Shulchan Aruch do not recognize a concept called bankruptcy, there are authorities who contend that, at least in some circumstances, halachah requires that a bankruptcy courts decision be honored. Gomel is eager to hear the full explanation, so his rav provides him with some background material to read until they make an appointment to discuss the matter at length.

Gomel truly enjoyed researching the topic, and discovered that he also wanted to know all the related subjects. As a result, he became somewhat of an expert on much of the halachic material germane to his question.

Responsibilities of a Borrower
One of the first topics Gomel researched was the extent that a borrower must go to pay his debts. He was surprised to discover how strongly halachah requires someone to repay his debts and to make his payments on time. In addition, it is strictly forbidden to claim that one is unable to pay a debt when he can, and it is similarly forbidden to hide money so that a creditor cannot collect. This is true even if the creditor is very wealthy.

It is forbidden to borrow money that one does not think he will be able to repay. According to some authorities, money borrowed under the false pretense that the borrower intends to repay it is considered stolen, and not borrowed, funds. The halachic ramifications of this distinction are beyond the scope of this article.

If a debtors loan is due and he cannot pay, halachah requires that he sell his house, his furniture and his other household items, if necessary, to repay the debt, unless he can convince his creditor to forgive the debt or to wait longer for payment (Graz, Hilchos Halvaah 1:5).

Since the debtor must use whatever money he has available to pay his debt, he is required to trim his expenditures so that he can pay his creditor. Until his debt is repaid, he may not make significant contributions to tzedakah (Sefer Chassidim #454). Furthermore, he may not purchase a lulav and esrog, but instead must fulfill the mitzvah by borrowing from someone else (see Pischei Teshuvah, Choshen Mishpat 97:8). It goes without saying that luxuries and vacations are out. Someone who uses his money to purchase non-essential items when he has an overdue debt demonstrates a lack of understanding of the Torahs priorities. One who squanders money and therefore is unable to repay his loans is called a rosho (Rambam, Hilchos Malveh 1:3).

Systematic Collection
Having researched how responsible a debtor must be, Gomel next studied the following topic: If a debtor unfortunately owes more money than he can pay, how does the halachah decide that we divide the debtors limited financial resources among his creditors?

Gomel discovered that the halachos governing who collects first are highly complicated. He also discovered that, when there are insufficient financial resources to pay all of the person's debts, halachah views the priorities of who receives, and how much, very differently from civil law. Here are some basic ideas.

The Gemara works with a concept called shibud by which most debts are automatically secured with property that the debtor owned at the time he created the obligation. When this system was followed, if a debtor defaulted on an obligation, a creditor who exhausted all means of collecting directly from the debtors holdings could collect these secured debts from real properties that the debtor once owned and had subsequently sold. The system in place allowed that potential purchasers could find out whether a property had a lien on it prior to purchasing it. (This would loosely parallel what we call today a "title search" performed before purchasing property to ascertain that the property is without any liens and that the seller has clear ownership.) The potential lien on all the properties of a debtor encouraged people to pay their debts so that they could sell their properties more easily, and also enabled people to borrow investment capital.

Who Collects First?
Under the Gemaras shibud system, when there are two or more claims on a property whose value is less than the outstanding debt, the creditor with the earliest claim collects as much as he can, and, after his claim is paid, the creditor with the next earliest claim collects, and so on (Shulchan Aruch, Choshen Mishpat 104:1).
When Gomel asked contemporary halachic authorities if this system is used today, he was told that one would not be able to collect from such properties unless they were mortgaged.

Why did the halachah change?

Since today no one applies the system of the Gemara, the creditor did not expect to be able to collect from any properties after the debtor sells them. As a result, the creditor did not acquire shibud on any of the debtors properties (Shut Igros Moshe, Choshen Mishpat 2:62).

Bad Talmudic debts
When there is no shibud claim on any properties, then, under the Gemaras system, the outstanding creditors collect, but not proportional to the amount that each is owed. According to most authorities, we still follow whose claim is earliest. Others rule that everyone is paid equally according to the availability of resources (Shulchan Aruch, Choshen Mishpat 104:13 and Sma). Either approach results in a major difference between the Gemaras system and the modern approach. Under the modern approach, the court calculates what is the ratio of the available resources to the debt, and pays all creditors a percentage of the debt based on the result.

By now, Gomel has studied much of the Gemara and commentaries on the topic of debt collection, and he has a good idea how bad debt was collected in the time of the Gemara. After reviewing his studies with Rav Chacham, Gomel is ready to understand how and if bankruptcy fits into a halachic system. He soon discovers that he now needs to master a very complicated concept of halachah called dina demalchusa dina.

Dina Demalchusa Dina
In the time of the Gemara, most countries and governments were kingdoms. This meant that the people living in an area recognized one individual to be responsible to maintain law and order within the country and to protect the citizenry from external enemies and greedy neighbors. Without a government, people are in constant danger from the chaos that occurs when there is no respect for a central authority. To quote the Mishnah in Pirkei Avos (3:2), "Pray for the peace of the kingdom, for if people are not afraid of it, one man will swallow another alive." Anyone who has ever seen or read of the mass looting that transpires when there is a breakdown of authority knows exactly what this means.

The king or government requires an army to protect the country from its external enemies, a police force to uphold law and order, and royal palaces and government offices that are well maintained so that the kings authority is respected. All this requires funding, and the people realize that they need to pay taxes so that the king and/or government can protect them (see Rashbam, Bava Basra 54b s.v. VeHaamar). The halachah of dina demalchusa dina recognizes that the king and his properly appointed agents have the right to collect taxes (Nedarim 28a).

Din Melech
When the tribes of Israel approached their prophet, Shmuel, requesting that he appoint a king, Shmuel attempted to dissuade them by noting the tremendous power that a king has. He will draft the most talented sons to till his fields, harvest his crops and perform other services; he will draft their daughters as perfumers, bakers and cooks; and he will raise high taxes (Shmuel I 8:11-18). The Gemara (Sanhedrin 20a) cites a dispute as to whether a Jewish monarch has the extensive authority that Shmuel describes or if Shmuel was simply threatening the people in an attempt to dissuade them from having a king. The Rambam (Hilchos Melachim 4:1) and most authorities rule that the king indeed does have this authority.

Some poskim understand that a non-Jewish king, also, draws his authority based on this concept of din melech. That is, the Torah reserved the rights described by the prophet Shmuel for any monarch. (Even for those who contend that Shmuel was merely threatening the people and that the king does not have this extensive authority, the concept of dina demalchusa dina is still accepted; they simply do not consider the din melech of Shmuel to be the source of the law of dina demalchusa dina.)

Democratic taxes
Although the early authorities discuss dina demalchusa dina primarily in terms of the rights of a king, most later authorities understand that this halachic power exists equally in a democracy (see Shut Yechaveh Daas 5:63).

Gomel discovered that the vast majority of halachic authorities regard dina demalchusa dina as a Torah-mandated concept (see Shut Dvar Avraham 1:1; Avnei Meluim 28:2; Shut Chasam Sofer, Yoreh Deah #314), although there is a minority opinion that contends that dina demalchusa dina was introduced by Chazal (Beis Shemuel, 28:3).

Many authorities rule that a king may not arbitrarily create new taxes; he may only collect that which has been previously established (Ritva, Nedarim 28a; see lengthy list in Encyclopedia Talmudis, Volume 7, page 318, footnote 559). Why is this true? When people appointed the original king to protect them, they accepted certain taxes with which to pay him for his "services." According to these rishonim, neither this king nor his successors have an arbitrary right to create new taxes or increase taxes without the consent of the governed.

Traffic and safety regulations
Thus far, we have seen that dina demalchusa dina governs the right of the king or the government to collect taxes. Dina demalchusa dina also requires obeying rules of the government, such as the prohibitions against smuggling and counterfeiting. However, dina demalchusa dina goes much further. Some authorities maintain that dina demalchusa dina requires everyone to obey government-created rules that are clearly for the common good (Ramban, Bava Basra 55a). One may argue that this includes traffic laws, and regulations governing sanitation, safety and health. Those who do not agree that dina demalchusa dina extends this far feel that dina demalchusa dina is limited to matters that more directly affect the government (see Maggid Mishnah, Hilchos Malveh 27:1). All opinions agree that dina demalchusa dina applies to matters which breach the authority of the governing parties (Igros Moshe op. cit.). The exact extent to which this is applied practically will affect Gomels original question, whether dina demalchusa dina applies to bankruptcy law.

No government influence
What areas of halachah are not subject to dina demalchusa dina?

Dina demalchusa dina does not replace the civil laws of the Torah (the laws of Choshen Mishpat) that govern the relationships between Jews (Shut Harashba 3:109, quoted by Beis Yosef, Choshen Mishpat end of Chapter 26; Shach, Choshen Mishpat 73:39). For example, dina demalchusa dina does not affect the laws of inheritance. These laws are governed by the Torahs laws of yerushah.

Similarly, the laws of damages (nezakin), the laws of shomrim responsibility for taking care of someone elses property and the property laws involved in marriage are all areas of halachah in which Jews are required to follow the laws of the Torah. Therefore, when a Jew lends an item to another, the laws governing his responsibility are those of the Torah, not the local civil code. This is because it is no infringement on the governments authority when people make their own arrangements as to how to manage these areas of their lives (Igros Moshe).

Government Influence
On the other hand, there are certain areas of contract law that are heavily influenced by dina demalchusa dina. For example, the laws of employee relations are governed by local custom (Yerushalmi, Bava Metzia 7:1), and these are usually heavily influenced by civil law.

What about Bankruptcy?
As I wrote above, the Gemara and the Shulchan Aruch do not mention any concept of bankruptcy. Gomel began to research if anyone discusses whether or not halachah recognizes the laws of bankruptcy under the laws of dina demalchusa dina. Indeed, he discovered a dispute among great authorities of the late twentieth century whether dina demalchusa dina applies to the laws of bankruptcy. In a responsum, Rav Moshe Feinstein rules that dina demalchusa dina applies only to matters in which the government takes an interest because they may affect the stability of the country. For example, if the country does not have consistent markets, this could create problems that the government wants to avoid. Therefore, the government has a halachic right under dina demalchusa dina to insist that its laws insuring stable markets are followed.

Rav Moshe concludes that the laws of bankruptcy are within the parameters of dina demalchusa dina, since the government has a right to insist that there be a consistent rule of law applied throughout the country regarding how bad debts are discharged.
In the case brought before Rav Moshe, a company had gone bankrupt, and the directors had paid one of its creditors for his outstanding debt in violation of the bankruptcy rulings. The question was whether the individual was required to return the money that he had been paid because of dina demalchusa dina. Rav Moshe ruled that if the company had already filed for bankruptcy when this money was paid, then the creditor is halachically required to return the money. This is because dina demalchusa dina establishes the regulations how one may pay once one has filed for bankruptcy.

We find responsa from two prominent European authorities, Rav Yitzchak Weiss (Shut Minchas Yitzchak 3:134), then the av beis din of Manchester (and later the Gaon Av Beis Din of the Eidah HaChareidis in Yerushalayim), and from Rav Yaakov Breisch of Zurich, Switzerland (Shut Chelkas Yaakov 3:160). (It is interesting to note that these two great poskim were mechutanim.) From the limited description of the cases that each responsum contains, it seems that they were asked concerning the same situation:

Reuven advanced Shimon a personal loan, and Shimon subsequently declared bankruptcy. As required by law, Shimon had notified all his creditors, Reuven included, that he had filed for bankruptcy protection and that Reuven had the right to protest the bankruptcy arrangements. Reuven did not protest the bankruptcy proceedings, which ultimately ruled that Shimon was required to pay only thirty cents per dollar owed to his creditors.

Subsequently, Reuven sued Shimon in beis din for the entire loan. Shimon contended that he is not required to pay Reuven any more than the thirty cents to the dollar that the bankruptcy court ruled that he was required to pay. Reuven, the creditor, claimed that he had never forgiven any part of the loan. He claimed that he did not protest the bankruptcy proceedings for several reasons, among them that he was unaware that a personal loan which was not meant for profit is included in bankruptcy proceedings.
The rav who was asked the shaylah referred it to these well-known poskim. They both contend that dina demalchusa dina does not apply to bankruptcy procedures. In their opinion, dina demalchusa dina never supplants an area of halachah where the Torah provides its own guidelines.

They do agree that if there was evidence that Reuven had accepted the courts ruling, he would no longer be entitled to full payment, because he had been mocheil, forgiven, the balance of the loan. Once someone is mocheil a loan or part of a loan, he cannot afterwards claim it. However, they contend that in the situation at hand, there is no evidence that Reuven was ever mocheil the balance of the loan.

It would seem from Rav Moshe Feinsteins responsum that he would have ruled differently and contended that once the court declared Shimon bankrupt, Reuven would have been obligated to honor the courts decision because of dina demalchusa dina.

At this point, Gomel sat down to discuss with Rav Chacham whether his own debtor can claim protection from the balance of his loan because he has declared bankruptcy. According to the Chelkas Yaakov, the Minchas Yitzchak, and other authorities, the debtor has no basis for claiming bankruptcy protection. According to Rav Moshe Feinstein, one would have to check with an attorney whether the debtors bankruptcy protects him legally from Gomels loan even though Gomel was not informed of the bankruptcy proceedings. Assuming that the bankruptcy proceedings can, indeed, protect the debtor, it would seem that, according to Rav Moshe and some other authorities, the debtor has grounds to his argument.

Conclusion
Lending money is a valuable mitzvah. When someone fulfills the mitzvah of lending money to a fellow Jew, he is not providing a gift, but a loan that he has a right to expect will be repaid. As the Tanna, Rabbi Shimon, notes in the second chapter of Pirkei Avos, "the evil path from which a person should distance himself" can be explained easily in the words of Dovid Hamelech: The wicked borrow and do not repay; whereas the righteous is gracious in his giving. Someone who borrows must always have a plan how he intends to return the funds.

This Shiur is published also at Rabbi Kaganof's site


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