Credit is the lifeblood of modern economies. Home loans, car loans, and business loans allow the consumer, individual businessman, and corporation to finance purchases and investment, which spurs demand, creates jobs, and allows economies to grow. However, a careful balance is required. Too little credit will slow an economy down and cause a recession, while too much credit can lead to inflation, bubbles, and borrowers taking on more debt than they can afford. This was evidenced by the implosion of the real estate market and the surge in the foreclosure rate at the end of the last decade. When companies or individuals find themselves unable to service their debt, they commonly have no choice but to resort to bankruptcy.
Chapters 7 and 11
In previous times, a debtor incapable of repaying a loan was thrown into debtors’ prison. Nowadays, most countries have some form of court-supervised bankruptcy proceedings. In this country, the most common forms of bankruptcy are Chapter 7 and Chapter 11. Chapter 7 allows for a corporation or individual to submit all their assets to the court, which liquidates the assets and distribute the proceeds to the creditors. Chapter 11 allows for the debtor to remain an ongoing concern by reducing the amount of the debt to be repaid and/or extending the maturities of the debt. In either case, the process absolves the debtor from any additional liability, even if he subsequently recovers financially and has the wherewithal to pay the debt in full.
The underlying theory of bankruptcy is that although individual creditors stand to lose when bankruptcy is declared, the net result of these laws is beneficial to society. If a debtor would remain liable for his overwhelming debts, he might be unable to recover and become reliant on government help, rather than starting anew and (hopefully) becoming a productive member of society. Chapter 11 bankruptcy enables a company to remain a going concern, which tends to preserve jobs and allows it to recover or be sold, which benefits the economy.
Repaying Loans in Halacha
Repaying a loan is a Torah imperative,[1] and refusing to repay may also involve a violation of a negative precept as well.[2] While the Torah is sensitive to a borrower who does not have the means to repay a loan, halacha has no bankruptcy mechanism that would discharge one’s debs. As such, it would seem that although civil law may allow a debtor to discharge his debt, this would not absolve a Jew of his halachic obligation to repay his loan.
Dina D’malchusa Dina
Dina D’malchusa Dina is an often-quoted, poorly understood term. To complicate matters, the varying opinions and the parameters of the law are hard to clarify. Simply put, it loosely translates as “the law of the land is the law.” This means that a king or any sovereign entity has the right to enact laws or collect taxes that are necessary. As such, a Jewish citizen who violates these laws is in violation of halacha as well. The question of course is, how expansive is Dina D’malchusa? In regard to this matter, there are essentially three principal views as to how broadly Dina D’malchusa can be applied:
1— It is limited strictly to areas critical for a government to function, such as taxes, currency regulation, import and export regulations, etc. As such, any evasion of taxes by a Jewish citizen is not only a violation of federal law, but is also a violation of halacha. This more limited view of is adopted by the Mechaber.[3]
2— It applies to any legislation that aids in the smooth functioning of society. This more expansive view is codified as halacha by the Rema.[4]
3— The Shach[5] limits Dina Dmalchusa to areas where it does not directly contradict an existing halacha.
Dina D’malchusa and Bankruptcy
Bankruptcy laws are not a critical requirement of government. As such, it would seem that Dina D’malchusa would not be applicable according to the view of the Mechaber. Similarly, permanent discharge of loans is in direct contradiction to Torah law; as such, relief under bankruptcy laws would not be permissible according to the opinion of the Shach. However, since these laws were enacted for the benefit of society, it would seem that bankruptcy could be valid halachically according to the Rema. Of course, it needs to be analyzed whether bankruptcy laws in fact have a net positive benefit for society. If it were found that on the whole, these laws were being abused and in actuality did little more than provide safe haven for reckless debtors, it would seem that even according to the Rema, they would not have halachic validity.
Minhag Hasochrim
Another area relevant to our discussion is that of Minhag Hasochrim (customary business practice). The Gemara explains that “minhag mevatel halacha” — local custom supersedes the halacha.[6] The underlying rationale is that when two people consummate an agreement, the assumption is that they are doing so according to customary practice. Consequently, if either of the parties had in mind terms that were at variance with the local custom, they must stipulate as such. Accordingly, it can be argued that when two parties transact in a country that has legal bankruptcy protection, each is accepting that risk unless they stipulate otherwise.
Application of Minhag
As with Dina D’malchusa, the question is, how broadly do we apply the concept of minhag mevatel halacha?
The Maharshach dealt with a group of creditors where the majority of creditors were willing to extend the payment terms to their debtor. One creditor was unwilling to do so and wanted relief as granted to him by halacha. The Maharshach ruled that since the custom among the merchants was that the majority could force the minority to a compromise, local custom would govern, and the lone creditor would have to acquiesce to the will of the others.
If Minhag can force a creditor to accept an extended time frame, there does not seem to be any rationale to prevent Minhag from allowing a complete discharge of the debt, as is the case in bankruptcy. Indeed, both Rabbis Blau and Basri apply the ruling of the Maharshach to modern Bankruptcy discharge.[7] However, a counter argument can be made that personal bankruptcy is not common enough today to qualify as a Minhag.
Corporations
The discussion above involves personal bankruptcy. In contrast, corporate bankruptcy is accepted by all poskim with little debate. The reason is that the entire concept of the corporation was created in order to limit the liability of the shareholders; as such, anyone transacting with a corporation is implicitly accepting that they have no recourse beyond the corporate assets.
Poskim and Modern Day Bankruptcy
Rav Moshe Feinstein validates bankruptcy based on Dina D’malchusa, as per the opinion of the Rema.[8] Although the teshuva deals with asset allocation and not permanent discharge, he seems to suggest that all areas where the government has a vested interest in consistency would be covered by Dina D’malchusa. Other poskim, as mentioned above, allow for bankruptcy based on customary business practice, as expressed by the Maharshach.
Nevertheless, this conclusion is not universal. Rav Yaakov Breish had a dissenting opinion and argued that Mechaber that limits Dina Dmalchusa to areas critical to the government would certainly reject modern bankruptcy discharge. Additionally, even the Rema would reject bankruptcy since it is not beneficial to society to allow people to default on their debts. (Rav Breish gave little credence to the argument that bankruptcy was a net positive to the economy). Furthermore, because it runs counter to a clear halacha, Dina Dmalchusa cannot apply, as per the Shach.[9]
It should be noted that the entire discussion applies only to a legitimate bankruptcy. If, however, a debtor denuded the corporation of its assets and then declared bankruptcy to avoid his creditors, all would agree that halacha would not recognize the subterfuge, and the debtor’s liability would remain.
[1] There is considerable discussion in the rishonim as to exactly which mitzvah applies. See Rashi, Kesuvos 86a, priyas; Shita Mekubetzes, ibid., quoting Talmidei Rabeinu Yonah; and Teshuvos Haradbaz (610) for three varying opinions.
[2] See Ahavas Chesed, Chapter 24.
[3] CM 369:6
[4] Ibid., 11
[5] CM 73:39. See also CM 356:10
[6] Bava Metzia Yerushalmi 6:1. It is important to note that this principle exclusively applies to monetary matters and does not spill over to the other areas of halacha.
[7] Pischei Choshen, Hilchos Halva’ah, Chapter 2, note 63; Dinei Mamanos vol. 1, page 71 note 17.
[8] Igros Moshe, CM, Vol. 2, no. 62.
[9] Chelkas Yaakov, Vol.2, no. 32.