Bankruptcy - Part III

Q. Is it ever ethical to file for bankruptcy?

A. Last week we discussed the requirement in Jewish law to provide certain basic exempt assets to an insolvent debtor and arrange a repayment schedule. However, none of the rules we discussed allowed for a discharge of the debt as we find in many bankruptcy settlements. The debtor is given a bit of relief from counterproductive or vindictive collection actions, and continues to pay back his debts to the best of his ability.

However, the Torah also provides for discharge of debt. We find in the book of Deuteronomy (Living Torah translation):

At the end of every seven years, you shall celebrate the remission year. The idea of the remission year is that every creditor shall remit any debt owed by his neighbor and brother when God's remission year comes around. You may collect from the alien, but if you have any claim against your brother for a debt, you must relinquish it. God will then bless you in the land that God your Lord is giving you to occupy as a heritage, and there will not be any more poor among you. (Deuteronomy 15:1-4)

The rationale for such a release is clear: it is sometimes in everyone's interest to give debtors a fresh start, a new lease on life that will give them the ability and the incentive to become productive citizens. If the debts were incurred in good faith but hardship intervened, then the creditor will gain little by demanding full repayment from an indigent debtor and a fresh start is called for.

Some commentators question the existence of a parallel between the Sabbatical year discharge and modern bankruptcy. They point out that the Sabbatical year discharge applies equally to rich and poor, and that only loans are exempt, not other kinds of debts. They also point out that it is considered praiseworthy to pay back cancelled Sabbatical debts when possible.

I don't think these objections are decisive. Debts are only cancelled in the Sabbatical year when they came due before the year begins but were left uncollected. In most cases this would apply specifically to insolvent debtors; debtors of means would have paid up beforehand or have their assets seized. We should add that throughout the Torah the assumption is that loans, which in ancient times were interest free, were given to poor people. Indeed, the release passage itself refers to this, pointing out that if we fulfill this commandment ultimately we will not lose from it because the result will be that "there will not be any more poor among you."

It is true that later Sages instituted a way to circumvent the automatic release of debts in the Sabbatical year.(1) The reason is that being too lenient on poor debtors ultimately works to their disadvantage; if creditors cannot enforce repayment they will not agree to lend and credit will be unavailable. (2) As a matter of public policy the Sages concluded that in that era allowing an automatic release was imprudent,(1) but that doesn't mean that allowing the court discretion to release certain debts, or to allow the Sabbatical year to release them, is somehow against the spirit of the law. The true lesson is that while allowing a fresh start is a worthy ideal, sometimes the economic and social conditions make it counterproductive.

It is true that some debts are not discharged in the Sabbatical year, but that is more an area of similarity than of difference to modern bankruptcy. In modern bankruptcy also different kinds of debts can be treated differently, and fraud in particular is a bar to a release. Jewish law may also consider some debts to persist after bankruptcy, and these should be paid even after a discharge whenever the opportunity presents itself. An example would a benevolent loan given under the understanding that all efforts would be made to repay. (3)

Judaism considers paying debts a positive obligation – a mitzvah. (4) Any time a person incurs a debt, he must do so with good faith and with reason to believe that he will be able to repay. He must then make every effort to obtain the means to fulfill his obligation.

But if unexpected setbacks make it impossible to pay, the Torah suggests an ideal of giving the debtor a fresh start. In many jurisdictions legislatures have identified with this ideal and introduced the ability for debtors to obtain such a fresh start, subject to various legal conditions and review. It is ethical to avail yourself of these laws if indeed your obligations were assumed with good faith, if you are properly eligible for the release, and if you need the discharge in order to obtain a true and fair fresh start in your affairs.

SOURCES: (1) Mishna Sheviit 10:3. (2) See e.g. Babylonian Talmud Yevamot 122b, Ketubot 88a. (3) See e.g. Responsa Chelkat Yaakov Choshen Mishpat 32. (4) Babylonian Talmud Ketubot 86a.