Bankruptcy: A Halakhic Perspective
by Rabbi Yiszchok A. Breitowitz
The social phenomenon of bankruptcy is one that is increasingly familiar to many Americans. In the past decade, major companies previously thought to be virtually invulnerable - airlines, hotel chains, real estate developers - have found it necessary to seek relief under federal bankruptcy law. In a given year, there are more bankruptcy cases filed in federal court than all other cases put together. As is true for all issues of social life, bankruptcy too is subject to a Jewish perspective. The central issue I would like to address is whether it is morally proper for a religious Jew to try to escape payment of debts by invoking bankruptcy relief. 1
At the outset, it must be recognized that the Torah considers the obligation to pay debts as absolute. There is, of course, a mitzvah in the Torah of giving charity (tsedokeh) and the Rambam tells us that the highest form of charity is making a loan to somebody because a loan is enabling someone to achieve self sufficiency. Therefore, according to the Torah, loans were not business propositions, loans were not investments. Loans were acts of charity, benevolence and generosity. That is form of tsedokeh. At the same time, however, the debtor's obligation to pay is considered to be an absolute obligation and there is no mechanism in halakhah that is tantamount to escaping your debts by filing a bankruptcy and obtaining a discharge.2
The Morality of Seeking Bankruptcy Relief
Given the fact that halakhah does not recognize the concept of discharge, which means you're liable no matter what, may a halakhically committed Jew ever file a bankruptcy petition? In other words, am I allowed to file bankruptcy, get a discharge and not pay my creditors if under Jewish law one always has to pay his creditors?
As is true in many matters, there is a diversity of opinion. Some opinions say that to invoke a bankruptcy discharge is theft; since under Jewish law you still owe that money, not paying it back is illicit. Other opinions say that even though halakhah does not recognize a bankruptcy discharge in a pure halakhic system, under the system that we live in one is permitted to utilize it. There are two different theories that are given. One theory is based on the Talmudic rule called "Dina D'Malchuta Dina." Now, this is Aramaic for the law of the land is halakhically the law that we must follow. That's a principle that needs a great deal of explanation. Obviously, the rule doesn't mean that secular law supersedes religious law in every respect. If secular law were to say don't keep the Shabbat, keep Sunday, we obviously wouldn't listen to it. If secular law would say that marriages can be terminated by civil divorce, we would not listen to that, we still have the requirement of get. The principle of Dina D'Malchuta Dina is limited to one sphere only. It does not apply to ritual law, it does not apply to family law, it applies exclusively to monetary matters. That regarding monetary obligations, regarding property rights, civil law is considered to be paramount. Thus, for example, it is against Jewish law for a person to evade the payment of income taxes. If civil law says you must pay taxes, then you're not only violating Title 26 of the United States Code, you are violating halakhah, when you engage in tax evasion. When it comes to ritual law, clearly secular law has no say in the matter at all but when it comes to monetary obligations, Dina D'Malchuta Dina. So, the argument goes, since bankruptcy law is a law that pertains to property rights and the like, the principle of Dina D'Malchuta Dina allows you to invoke a bankruptcy discharge.
There is yet another theory that would allow the same thing, and that is what I would call the "rules of the game" theory. If I lend you money and am aware of the fact that under American law there are escape mechanisms, in effect, I have agreed to put myself in that system. For example, if we were to enter an express agreement that if I lend you money you don't have to pay me in the event of a bankruptcy, that would be our agreement, that's our contract. Taking this one step further, it may be asserted that every contract that is made is made with the knowledge and understanding of the prevailing rules that apply in this game and, therefore, halakhah would permit a bankruptcy discharge not as a matter of bankruptcy per se but as a matter of a term that was implicitly incorporated in the background of the agreement. Therefore, once again if we could have made this expressly part of our agreement, it could be made implicitly part of our agreement. In short, there are two distinct rationales for permitting the invocation of bankruptcy relief: (1) the principle of Dina D'Malchuta Dina which enables secular law to trump religious law in the monetary sphere; (2) implicit incorporation as a term of the agreement.
I would suggest there are some practical differences between those two theories. There is a big difference between declaring bankruptcy on money you owe the bank and declaring bankruptcy on money that you owe your Aunt Tillie. If the justification rests on the concept that people who lend know the rules of the game, this may apply to a commercial loan but does not necessarily apply to your next door neighbor or your friend who may not even be aware of bankruptcy as an option of escaping. Therefore, if we were to adopt the first theory of Dina D'malchuta Dina, nonpayment following bankruptcy would be permitted no matter what the loan or the creditor. If permissibility hinges on the second theory, however, one would have to pay very close scrutiny to the nature of the creditor's sophistication and the like. This approach would say that essentially when a knowledgeable sophisticated lender lends you money, they are lending you money against the backdrop of the rules of the game. So, when you take advantage of those rules, you are doing nothing more than what the contract by implication allowed you to do. By contrast, however, when you're dealing with an Aunt Tillie or the like, who is not aware of those rules of the game, you would not be allowed to invoke bankruptcy. Of course, this would also mean you could never invoke bankruptcy against people who are creditors not by choice. For example, if you ran somebody over they are also your creditor, but since they never negotiated for that status you would not be permitted under this theory to invoke bankruptcy relief against them. As a practical matter, you could go through a bankruptcy but halakhah may require that you reaffirm your commitment to resume payments to certain creditors because it would be immoral and against halakhah to deprive them of their rights.
In a secular system, bankruptcy and financial difficulty are regarded as a two-way problem between a debtor and a creditor; in Judaism it is regarded ultimately as a societal problem. Under a Jewish society if a person finds himself in a very difficult situation, it is not just his own tough luck. Rather there is an obligation on the community to support people who have fallen on hard times. Indeed, the Talmud states that the obligation of supporting people is not merely to put them on a subsistence level, but to support them in the manner and the standard of living to which they have been accustomed. If the rich fellow who became poor was used to having a servant and a chauffeur and a valet, or a horse and a driver in those days, the obligation of tsedokeh is to give that person a horse and a driver, and a valet and a chauffeur. Now, obviously there are going to be priority problems. If there's not enough to give bread to give everybody who needs it, then you're not going to give this guy a chauffeur. But, assuming that there is a sufficient balance in the charity fund, then we even use it for that.
The emerging pattern is therefore the following: on one hand, secular law is more generous to the debtor vis-a-vis the relationship to the creditor. The secular law gives the debtor more escape hatches than does Jewish law. Jewish law basically says you have no way of escaping the clutches of the creditor. But that has to be understood in tandem with the fact that the communal responsibilities toward the debtor are much greater. Essentially, what a secular bankruptcy tells the creditor is, you Mr. Creditor suffer the risks of the debtor's bad fortune. You lent him the money, if he escapes that, you suffer the loss. Halakhah says the loss is not going to be suffered by the creditor but the loss will in effect be shared by society as a whole. It's really the theory of loss spreading like insurance. Insurance is often described as a loss spreading mechanism, that instead of one person suffering a catastrophic loss, all of society through premiums bear a little bit of that loss. I would describe the halakhic debt collection system that way as well. Which means, if you only look at it in terms of a creditor and a debtor, it looks like we have a fairly hard headed system. Debtor has no means of escape. But if you look at the total picture in terms of societal obligations, then you can actually see that it's really a very sophisticated loss sharing mechanism a system that is profoundly more responsive and compassionate to the plight of poverty and difficult circumstances.
Indeed, historically, Jewish societies (when there was self government during the Middle Ages) had innumerable social welfare institutions that took care of people's needs in a very responsible, compassionate way, institutions that were supported by taxes that the Jewish communities would levy on the inhabitants of those communities. And even today, there is a mitzvah upon us to give at least 10% of our income to charity and it is laudable to give up to 20% if you're able to afford that. (In fact Orthodox Jews often get audited by the IRS, because the average charitable contribution level in the non-Jewish world is considerably less than 5%. So, the IRS is not used to that standard of giving.)
In truth, this illustrates an essential proposition concerning many of the so-called hard line teachings of Judaism. Whenever you assess any particular aspect of Judaism, you have to look at the parts as part of an integrated whole and not just isolate the single straits, taken out of context. In Judaism, as in life, let us beware of unfounded generalizations based on incomplete information. May our recognition of the vast riches of our Torah spur all of us to greater commitment to learning and observance.
1 The primary reason individuals file for bankruptcy is to obtain a discharge. Under Title 11 of the United States Code, a debtor who files for bankruptcy will usually receive a discharge wiping virtually all of his debts off the slate. Certain debts, however, may continue to survive, e.g. alimony, child support, student loans, most taxes, and criminal fines such as traffic tickets. See 11 U.S.C. §523. As will be noted, halakha neither recognizes the concept of discharge nor the idea of a statute of limitations that says that if a creditor fails to act by a certain time, he is barred.
2 Nevertheless, two notable protections that debtors enjoy under halakha are: (1) protection from creditor harassment - it is prohibited for a creditor to put pressure on a debtor under circumstances where a debtor is unable to pay (the rabbis of the Talmud were so meticulous about this that a lender would not even walk by his debtor's house because the debtor may feel a pang of embarrassment or shame); (2) certain property is left to the debtor and exempt from debt collection, e.g., a 30-day food allowance, one year's worth of clothing, tools and implements needed for a trade or business (including computers, medical equipment and the like), and funds that were received as charity. Nevertheless, the debt per se never goes away and if debtor wins the lottery 20 years later, creditor may go after him
Source: Reprinted with permission from Jewish Law Articles