This week’s parsha
includes details about being honest in our business dealings. Is declaring
bankruptcy to absolve one of one’s debts, considered honest according to
halachah?
The Bankrupt
Borrower
By Rabbi Yirmiyohu
Kaganoff
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?”
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 a bankruptcy court’s 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 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 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 Torah’s
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
debtor’s 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
debtor’s 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 Gemara’s
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 debtor’s properties (Shu’t
Igros Moshe, Choshen Mishpat 2:62).
Bad Talmudic debts
When there is no shibud
claim on any properties, then, under the Gemara’s 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 Gemara’s
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 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. 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 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 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 Gomel’s
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 (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 it is no infringement on the government’s
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 HowHowHH
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 (Shu’t 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
(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
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 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 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 Feinstein’s responsum that he would have ruled differently and
contended 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 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 debtor’s bankruptcy
protects him legally from Gomel’s 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.
--
Copyright 04 May 2014 Rabbi Kaganoff
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