The Bankrupt Borrower | Rabbi Yirmiyohu Kaganoff | Beit Midrash

Jewish Laws and Thoughts
Charity and Lending Money

קטגוריה משנית

The Bankrupt Borrower
Mr. Gomel Chessed shares with his rav, Rav Chacham, the following predicament: "I loaned someone money, but I did not pester 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 me back. He replied that he was forced into bankruptcy and, thereby, absolved of all his debts. Does he, indeed, no longer owe me for the loan?"

Gomel’s 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 we respect a bankruptcy court’s decision. Gomel is eager to hear the full explanation, so his rav provides him with some background material to read, and they make an appointment to discuss the matter at length.

Gomel truly enjoyed researching the topic, and discovered that he also wanted to know 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 to which 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 his debts when he can, and it is similarly forbidden to hide money so that a creditor cannot collect. All this is true even if the creditor is very wealthy.

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

If a debtor’s 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 either to forgive the debt or, at least, 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 them 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 Torah’s priorities. One who squanders money and therefore is unable to repay his loans is called a rasha (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 on the division of the debtor’s limited financial resources among his creditors?

Gomel discovered that the halachos governing who collects first are extremely complicated. He also discovered that in a case where a person’s financial resources are insufficient to cover his 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 shi’bud, by which most debts are automatically secured with property that the debtor owned at the time he created the obligation. Under this system, if a debtor defaulted on an obligation, a creditor who exhausted all means of collecting directly from the debtor’s holdings could collect these secured debts from real properties that the debtor had owned at the time of the loan and subsequently sold. The system in place allowed potential purchasers to 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 to ascertain ownership of a property and whether there are any liens on it.) 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 Gemara’s shi’bud 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?

Rav Moshe Feinstein explains that since a creditor does not expect to be able to collect from properties that have been sold by the debtor, he does not acquire shi’bud on them (Shu"t Igros Moshe, Choshen Mishpat 2:62).

Bad Talmudic Debts
When there is no shi’bud claim on any properties, under the Gemara’s system, the outstanding creditors collect, but not in proportion to the amount that each is owed. According to most authorities, we still follow the FIFO (first in, first out) rule of paying the earliest claim first, although others rule that everyone is paid equally, according to the availability of resources (Shulchan Aruch, Choshen Mishpat 104:13 and Sm"a).

The latter approach also results in a major difference between the Gemara’s system and the modern approach. Under the modern approach, the court calculates the ratio of available resources to debt, and pays all creditors a percentage of their debt based on the result. According to halachah, if someone owes $500,000 to 50 different people but has only $5,000 with which to pay, and each individual is owed at least $100, then they each collect $100, regardless of the actual amount that each one is owed.

By now, Gomel has studied much of the Gemara and commentaries on the topic of debt collection, and he has a good idea of how bad debt was collected in the time of the Gemara. After reviewing his studies with Rav Chacham, Gomel was ready to understand how and if bankruptcy fits into a halachic system. He soon discovered that he now needs to master a different, 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 as being 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 would swallow another alive." Anyone who has 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 king’s 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. VeHa’amar). 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:, saying: 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 described, or if Shmuel was simply warning 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 those who contend that Shmuel was merely warning the people, and that the king does not have this extensive authority, accept the concept of dina demalchusa dina; they simply do not consider the din melech of Shmuel to be the source for 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 Shu"t Yechaveh Daas 5:63).

Gomel discovered that the vast majority of halachic authorities regard dina demalchusa dina as a Torah-mandated concept (see Shu"t Dvar Avraham 1:1; Avnei Meluim 28:2; Shu"t Chasam Sofer, Yoreh Deah #314), although a minority opinion 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 collect only that which has been established previously (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 a right to create new taxes or increase taxes arbitrarily, 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 obligates us to obey 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 rules governing traffic laws, 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). However, all opinions agree that dina demalchusa dina applies to matters that contravene the authority of the governing parties (Igros Moshe op. cit.). The exact extent to which this is applied in practice will affect Gomel’s original question: whether dina demalchusa dina applies to bankruptcy law.

No Government Influence
Which 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 (Shu"t 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 Torah’s laws of yerushah.

Similarly, the laws of damages (nezakin), the laws of shomrim – responsibility for taking care of someone else’s 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 there is no infringement on the government’s authority when people make their own arrangements regarding how to manage these areas of their lives (Igros Moshe).

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

What about Bankruptcy?
As I wrote above, the Gemara and the Shulchan Aruch do not mention the concept of bankruptcy. Gomel began to research if anyone discusses whether halachah recognizes the laws of bankruptcy, under the laws of dina demalchusa dina. Indeed, he discovered a dispute among great twentieth-century authorities regarding 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 sound 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 governing 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 a consistent rule of law be applied throughout the country regarding the discharge of bad debts.

In the case brought before Rav Moshe, a company had gone bankrupt, and the directors had paid one of its creditors, 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 the lahachah of dina demalchusa dina.

Rav Moshe ruled that, if the company had already filed for bankruptcy when this money was paid, the creditor is halachically required to return the money. This is because dina demalchusa dina establishes the regulations of how a person or entity that has filed for bankruptcy may pay its debts.

On the other hand, we find responsa from two prominent European authorities, Rav Yitzchak Weiss (Shu"t Minchas Yitzchak 3:134), who was then the av beis din of Manchester (and later the Rosh Av Beis Din of the Eidah HaChareidis in Yerushalayim), and from Rav Yaakov Breisch of Zurich, Switzerland (Shu"t 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 about the same situation:

Reuven advanced Shimon a personal loan and Shimon subsequently declared bankruptcy. As required by law, Shimon 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. Ultimately, the court ruled that Shimon was required to pay thirty cents per dollar of debt.

Subsequently, Reuven sued Shimon in beis din for the entire loan. Shimon contended that he was not required to pay Reuven more than the thirty cents to the dollar, as per the bankruptcy court’s ruling. Reuven, the creditor, claimed that he had never forgiven any part of the loan. He argued that he did not protest the bankruptcy proceedings for several reasons, among them that he was unaware that a personal loan without interest is included in bankruptcy proceedings.

The rav who was asked the shaylah referred it to these well-known poskim, both of whom contended that dina demalchusa dina does not apply to bankruptcy procedures. In their opinion, dina demalchusa dina never supplants an area of halachah in which the Torah provides its own guidelines.

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

It would seem from Rav Moshe Feinstein’s responsum that he would have ruled differently, contending that once the court declared Shimon bankrupt, Reuven would have been obligated to honor the court’s decision because of dina demalchusa dina.

At this point, Gomel sat down to discuss with Rav Chacham whether his own debtor could claim protection for the balance of his loan, since he had declared bankruptcy. According to the Chelkas Yaakov, the Minchas Yitzchak, and other authorities, a debtor has no basis for claiming bankruptcy protection. On the other hand, in certain circumstances, Rav Moshe might contend that the debtor need not repay more than the court has ruled.

Conclusion
Lending money is a valuable mitzvah. When someone fulfills this precious mitzvah of lending money to a fellow Jew, he is not donating a gift. 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 described by 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 as to how he intends to return the funds.

This Shiur is published also at Rabbi Kaganof's site

Charity and Lending Money