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Beit Midrash Series P'ninat Mishpat

part II

Chapter 106

Precedence in the Payment of Multiple Debts

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Rav M. Feinstein (Igrot Moshe Choshen Mishpat II, 62) points out that according to the Shach, there is little difference between the Torah law and the secular law concept of bankruptcy, which says that a bankruptcy trustee distributes the debtor’s liquidated property equally among creditors. True, halachically this is so only for movable objects, not real estate. However, the difference between the two types of property is that only on real estate is a binding lien created that allows payment from it even after it has been sold to a third party. Rav Feinstein posits that nowadays there are no liens because creditors work with the assumption that they will not be able, due to the law of the land, to receive payment from property if it is sold. Given this, the holder of the earlier debt will have no advantage.
P'ninat Mishpat (575)
Various Rabbis
105 - Precedence in the Payment of Multiple Debts
106 - Precedence in the Payment of Multiple Debts
107 - Interrogation of Witnesses
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Furthermore, liens work halachically only when a document is signed by two "kosher" witnesses, an uncommon occurrence these days. Another case where, according to Rav Feinstein, timing does not create precedence is when the struggle for the funds is not between creditors but between stockholders, because stockholders are not classical creditors but partners in the company.
A major difference that exists between Torah law and secular law in this matter is in regard to seizure. According to halacha, if a creditor seizes movable objects for payment of the debt, he may be able to keep them; secular law does not recognize this concept. Rav Feinstein says that in this matter, we are to follow the law of the land based on the Rama (CM 369:11) that the law of the land applies to matters for the benefit of the king or that of the constituency. Rav Feinstein understands this latter ruling broadly, saying that a government cannot allow matters of transactions or debt payment to differ depending on who is involved in the deal. It is in regard to more local matters, such as relations between neighbors, inheritance and the like that there can be different practices for different sub-populations.
Another relevant issue is the Bach’s (CM 96) opinion that one who sold merchandise to the bankrupted person and was not paid is the first person to receive payment. The Tzemach Tzedek (117) says that this was instituted by the "Four Lands’ Council" and applies only where it was accepted. The Chatam Sofer (CM 55) says that it was instituted only for the wicked who knew when they bought the objects that they could not pay and that even that practice was not in use in his place. We have no indication that it is in practice in Israel. We do see, though, that there is room for instituting new practices in this regard to help the society of the time, which legitimizes present day laws that help affected debtors and creditors.
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