Bankruptcy in Halacha

In the secular world, one who declares bankruptcy is generally exempt from having to pay back any outstanding debts. Ever. Halacha, however, does not include a bankruptcy clause, especially one that inherently frees one from debt. Nevertheless, halacha does accept most of the legal consequences that result from declaring bankruptcy. It must be noted that this chapter only relates to a situation where a person who declares bankruptcy is truly penniless. It does not apply to a person who declares bankruptcy, but remains financially secure from other sources.

It is not completely clear, however, if one who declares bankruptcy, and later becomes wealthy, is halachically required to repay the debts that remain from before bankruptcy. Are creditors, who previously agreed at the time of bankruptcy to accept only a portion of what they were truly owed, entitled to later sue for the remaining monies?

Although not unanimous, most halachic authorities rule that bankruptcy is final and the debtor is not 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 with 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 d’malchuta dina"), as well.[1] This is because halacha accepts the authority of common business practices that are governed by secular law.[2] What this essentially means is that one who engages in trade, commerce, and other business dealings automatically implies an acceptance of all the legal issues and regulations that govern it, including the bankruptcy clause.[3]

Furthermore, a number of authorities maintain that once a creditor has despaired of being paid back ("ye'ush"), there is no obligation to do so, even if one later becomes wealthy.[4] Nevertheless, from the perspective of middat chassidut and peshara, it is certainly meritorious to offer some form of compensation and appeasement to one's creditors. Our sages teach us that repaying one's debts is a moral obligation.[5]

Other authorities disagree, however, and rule that a debtor is required to pay back his 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 does not apply to this aspect of bankruptcy, nor does it ever erase debts and loans between Jews.[6] It is further noted that creditors do not wholeheartedly dismiss or forgive monies owed to them when a debtor goes bankrupt, they merely salvage whatever they can. Creditors would certainly appreciate recovering their money in the future should the opportunity present itself.[7]

Halacha considers one who plans a "bankruptcy" simply in order to evade debts and responsibilities to be a swindler and a thief. In such a situation, action may be taken against such an individual in Beit Din.[8] Of course, every case must be judged separately and on its own merits.

All of the above applies only to debts accrued in the course of business. A personal loan, however, must always be paid back regardless of all other considerations. Halacha does not recognize a declaration of bankruptcy to exempt one from repaying a personal loan.[9] Indeed, one is required to sell one’s home, furniture, and most other possessions in order to pay back a debt.[10] It should also be noted that it is forbidden to borrow money if there is reason to believe that one will not be able to pay it back. In fact, one who borrows money knowing that he won’t be able to repay it is considered to be a thief, not a borrower.

[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; Minchat Yitzchak 3:134; 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. This does not include shemitta and prozbul-related considerations.

[10] Shulchan Aruch Harav, Hilchot Halvaa 1:5. See also Sefer Chassidim 454 and CM 97:23 with Pitchei Teshuva 97:8.