Bankruptcy and Loan

Defaults
By Rabbi Joshua Flug

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 I. Intro-The current economic crisis has forced people to make tough decisions
regarding the mounting bills they have to pay. There are people who simply can't
pay all of their bills and are forced to default on mortgage payments or declare
personal bankruptcy. In this shiur, we will discuss the following questions:
a. Are there times when it is ethical to simply default on a loan when there is no
recourse from the bank?
b. When money is owed to multiple sources, how does one choose who comes
first?
c. Does Halacha recognize bankruptcy as a valid means of discharging one's
debt?
d. There are people who are "upside down" on their mortgage, meaning that they
owe more money to the bank than the value of their home. There are those
that advocate that in this situation, one should simply stop making mortgage
payments and allow the bank to foreclose on the house. Others disagree that
this is unethical. We will provide some halachic sources on this topic in an
attempt to promote further discussion about this issue. (See here and here).
e. It should be noted that this shiur outline is for educational purposes only.
There are multiple factors in each situation that need to be addressed and this
shiur outline only provides background into the issues.
II. How does Halacha deal with a person who can't pay back a loan?
a. The Torah {} has a specific lo sa'aseh against collecting a loan improperly. The Gemara
states that this applies to collecting from someone who is too poor to pay back the loan {}.
b. The proper method of collection from someone who has insufficient funds to repay the
load is through beis din.
i. Beis din will not forgive any part of the load. Rather they will set up a
system where the debtor can eventually repay the load and still be able
to live his life.
1. In U.S. law, an individual generally has the option to file for
Chapter 7 or Chapter 13. Chapter 7 discharges almost all debt
in exchange for liquidation of the debtor's assets. Chapter 13 is
a reorganization of the debt, whereby a portion the debtor's
future income is allocated to paying off the debt. In chapter 13,
no liquidation occurs.
ii. Halacha, which does not recognize bankruptcy per se, calls for
liquidation of the debtor's assets as well as wage garnishment until all
of the loans are repaid.
1. There is a dispute in the Gemara regarding whether we make a
payment plan for the debtor and allow him to retain him to
retain his basic necessities. {}
a. The original concept of this option is found in a Mishna
regarding what happens when one defaults on a pledge
of erchin. {} One opinion is that there is a gezeirah
shava from erchin that we allow the debtor the freedom
of retaining his basic necessities.
b. The other opinion is that we totally liquidate his assets
and when he earns more money, we take that as well.
c. There is a machlokes rishonim regarding the psak
i. Rambam (1135-1204) follows the opinion that
we allow the debtor to retain his basic
necessities. {}
ii. Rabbeinu Tam (c.1100-1171) follows the
opinion that we do not. {} According to
Rabbeinu Tam, when it comes time to collect,
you can even take the shirt off his back (see
Tosafos, Baba Kama 11b s.v. Afilu). {}
2. Rambam writes that you can't liquidate the movable properties
of the wife and the children except for the Shabbos clothing
and jewelry. {}
a. The source for this ruling is the Talmud Yerushalmi
that discusses a situation where brothers inherited an
estate and until now they were using funds from the
estate without being particular about who spends more.
Now they want to split the estate. The Yerushalmi
rules that the wives and children may keep the weekday
clothes that they received from the estate, but the
Shabbos clothing and the jewelry must be returned to
the estate. {}
b. R. Vidal of Tolosa (Magid Mishneh late 14th century)
notes that Rambam understands that the reason why
they have to return the Shabbos clothing is that when
the husband gave it to his wife as a gift, he never had in
mind to give it as a gift, but rather just to use it, and if
he ever needed it, he would take it back. Since, it
doesn't technically belong to the wife, a creditor may
seize it when he is collecting the loan. {}
 c. Mordechai (1250-1298) quotes Maharam MiRutenberg
(1215-1293) who disagrees and exempts the wife's
clothing and jewelry from collection. Maggid Mishneh
quotes a similar opinion explaining that you can't
compare the two cases. {}
d. Shulchan Aruch, C.M. follows Rambam's opinion. {}
i. Rama follows the yesh cholkin, but it is unclear
what his actual position is.
ii. One could understand that he follows the
opinion that all of the wife's assets are
untouchable.
iii. Sema writes that he is only referring to clothing
and not to jewelry. {}
iv. Aruch HaShulchan writes that even if you can
go after the gold and silver, it is only the items
that are not worn. Anything that she wears is
hers. {}
3. Can a creditor seize the debtor's home?
a. In general real estate is subject to seizure for failure to
pay for a debt.
b. The question is, when the beis din arranges a payment
plan for the debtor to pay back the creditors, do they
allow him to keep his house?
i. Rashba implies that we take his home. {}
ii. There is a teshuva of the Rambam where he
writes that we provide him a place to live and if
the least expensive place to live is his own
home, we allow him to keep his house. {}
iii. Shach (quoting Mahara Sason who quotes
Rashba) rules that we do take his home. {}
III. How Does One Choose Who To Pay First? There are two factors to consider:
a. The Mitzvah of paying workers on time
i. The Torah has a negative commandment {} as well as a positive
commandment {} to pay workers on time.
ii. The Mishna states that the mitzvos apply to all types of services
including rental of equipment. {}
 iii. The Mishna also states that one does not violate these mitzvos if no
claim is made for the money. {}
iv. The Mishna states that if someone is hired for period of time, he is
paid when that period of time concludes.
1. The Gemara quotes a Beraisa that this applies to a contractor as
well. As soon as he completes the job and hands over his
material, he must be paid by the end of the day. {}
v. The mitzvos of paying on time only applies if one has the funds to pay.
If one does not have the funds, these mitzvos don't apply. {}
1. R. Yisrael M. Kagan (Chofetz Chaim 1838-1933) in his work
Ahavas Chesed, writes if one has money deposited elsewhere,
it is considered as having funds. {}
2. The Chofetz Chaim also deduces from the comments of Sefer
HaChinuch {} that one must liquidate some assets if it is not
very costly.
3. Based on Chofetz Chaim's comments, R. Tzvi Spitz rules that
if one has stock in another company, he must liquidate the
stock in order to pay his employees. {}
vi. Do the mitzvos of paying on time take precedence over other financial
obligations?
1. The Chofetz Chaim writes that if one must pay two people for
their work and one of them is past due and the other is due
today, one should pay the one whose time is today in order to
fulfill the mitzvos of paying on time, perhaps even the one who
is past due is poor and the other is rich. {}
2. In applying this practically, this doesn't necessarily mean that
making payroll comes before paying vendors. If a vendor
finishes his service, he is also entitled to immediate payment
and therefore, there are times when a vendor must be
considered on par with payroll.
3. The Chofetz Chaim writes that if there are multiple employees
and not enough money for all of them, the money should be
split among the recipients and not given to the first person who
asks for it. {}
b. The time the loan was initiated
i. Shulchan Aruch writes that if there are two loans, the earlier one takes
priority. Earlier is not defined by when the payment was due, but
rather when the loan was initiated. {}
 ii. Shulchan Aruch also rules that there is no difference between a milveh
al peh and a milveh b'shtar. {}
1. A late payment to an employee or contractor would be
considered a milveh al peh unless there is a contract that
specifically places a lien on a property. The time of the
initiation of the loan is when the work is complete.
c. There are many more details that need to be addressed and they can be found
in Choshen Mishpat Siman 104.
IV. Can Declaration of Bankruptcy have Halachically legal standing? -This issue is
addressed in an article by Steven Resnicoff available here. He identifies two
reasons why bankruptcy might be a viable option:
a. Ye'ush- Does debt disappear if the creditor does not expect to ever see his
money?
i. Maharik (c. 1420-1480) discusses this case and states that ordinarily,
ye'ush does not apply to a loan. However, there are cases where one
might apply it. {}
ii. R. Yosef Karo, both in Beis Yosef and Shulchan Aruch, deduces from
Maharik's opinion that we don't apply ye'ush to loans. {}
iii. Rama writes that ye'ush does apply to loans. {}
iv. R. Tzvi Ashkenazi (Chacham Tzvi, 1656-1718) questions Rama's
opinion and takes issue with Maharik's assertion that there are times
when ye'ush is applicable. {}
v. R. Aryeh Leib Heller (Ketzos HaChoshen, 1745-1813) justifies
Rama's opinion. He writes that we don't assume ye'ush applies to a
loan in a case where the debtor has no funds or he is bullying the
creditor. However, in a case where there is an inherent flaw in the
loan that would cause one to believe that he is not going to collect the
money, we do assume that there is ye'ush. Rama's ruling refers to the
second type of ye'ush and that is why he considers it a valid form of
ye'ush. {}
vi. In applying this discussion to bankruptcy, if one accepts the opinion of
Ketzos that an inherent change in the status of the loan can create
ye'ush, when someone files for bankruptcy, it can arguably be
considered ye'ush.
b. Dina D'Malchusa Dina- When the government accepts bankruptcy, does that
affect the halachic status of the deal?
i. The Gemara has a discussion regarding which types of documents are
valid with non-Jewish witnesses. One approach is that only shtarei
 ra'ayah are valid. Another approach is that even shtarei kinyan are
valid because of the concept of dina d'malchusa dina. {}
ii. Rashba (1235-1310) quotes two opinions regarding the conclusion of
the Gemara: {}
1. Some Rishonim are of the opinion that the two opinions
dispute whether dina d'malchusa is applicable in transactions.
We follow the opinion that it is not applicable because it
doesn't relate to taxes, or other laws that directly benefit the
king.
2. Other Rishonim assert that dina d'malchusa is effective for any
law that was enacted to benefit the people. The only reason
why the Gemara mentions another approach is that the Mishna
may have been referring to a case where there was no dina
d'malchusa regarding these transactions. Therefore, if the
government recognizes this type of transaction, it is considered
effective.
3. Shulchan Aruch follows the first approach of Rashba. Rama
follows the second approach. {}
iii. In applying this to bankruptcy, if one accepts dina d'malchusa beyond
taxes, it is arguable that a declaration of bankruptcy will override the
halachic obligation to pay the loan.
iv. Another factor to consider is that the initial loan is written with the
assumption that the lender may declare bankruptcy. Steven Resnicoff
quotes R. Moshe Heinemann that in this regard there may be a
difference between a corporation who provides a loan, where they
certainly factor in the possibility of bankruptcy into the cost of the
loan, and a private individual, who may not be cognizant of that
possibility actually happening.
V. The Ethics of Walking Away from a Home
a. The Halachic status of a mortgage
i. The Gemara notes that there are certain types of loans that are tied to a
specific piece of property. In general these are referred to "apotiki"
which is a conjugation of a-po t'hei kai, it will be placed on this. There
are two types of apotiki, a regular apotiki and apotiki mefurash. In a
regular apotiki, if there is a default on the loan, one collects from other
properties if the named property is insufficient to repay the loan. In an
apotiki mefurash, one states at the time of the loan that one can only
collect from that specific property upon default. Therefore, if the
property is destroyed, there is no recourse when there is default. {}
 ii. When the property is destroyed in an apotiki mefurash, can one simply
walk away from the loan and give the creditor the property?
1. Rabbeinu Nissim (1320-1380) implies that if there is an apotiki
mefurash and the apotiki is destroyed, the creditor forfeits his
credit. {}
2. R. Yosef D. Soloveitchik seems to follow Ran's approach and
explains that when there is an apotiki mefurash it is as if the
loan is already paid off. {} [Ostensibly, one would have to add
that the chidush of apotiki mefurash is that the borrower has
the right to pay money instead of giving up the land.]
3. Nevertheless, a number of Acharonim are of the opinion that
an apotiki mefurash does not absolve the borrower of the debt.
If the property is destroyed, the borrower must pay the creditor
when he receives money. [See for example R. Shalom Gelber's
work on Ribbis, Nesivos Shalom. {}]
iii. From a legal standpoint, when one closes on a house with a standard
mortgage, he signs two separate documents:
1. The promissory note which states: BORROWER’S PROMISE
TO PAY
In return for a loan that I have received, I promise to pay U.S.
$_________________________ (this amount is called “Principal”),
plus interest, to the order of the Lender. The Lender is
________________________________________________________
_____. I will make all payments under this Note in the form of cash,
check or money order.
2. The mortgage which is a separate document that is available as
recourse upon the borrower's failure to pay.
3. As such, the mortgage is not set up as an apotiki mefurash and
it is difficult to argue that the lender should incur the loss when
the property is devalued.
b. Defaulting on a loan when one has the means to pay
i. The Gemara quotes one opinion that the driving factor for enforcing
repayment of a loan is a mitzvah. This is known as p'rias ba'al chov
mitzvah. {}
1. R. Aryeh Leib Heller (1745-1813) notes that the mitzvah only
applies when there is a claim from the creditor. If the creditor
never claims the money, the mitzvah doesn't apply. {}
 ii. Additionally, when the creditor forgot about the loan, there is a
mitzvah of hashavas aveidah. This helps explain the concept of
hafka'as halva'ah regarding a non-Jew: [Note: Use your discretion
before discussing this issue.]
1. Rama seems to limit the concept of hafka'as halva'ah to a case
where the creditor never collects the loan. {}
2. As such, the only mitzvah that applies in paying back the loan
is hashavas aveidah.
3. Since, hashavas aveidah only applies between Jew and Jew, the
debtor has no obligation to seek out his creditor to pay back the
loan.
4. It should be noted that when there is a foreclosure, the bank
doesn't deal with this using some corporate office on the other
side of the country. They generally get involved on a local
level and there is potential for chilul HaShem if the debtor does
have the means to pay and is defaulting in order to make
money.
c. To summarize this issue, it is difficult to make a case that one can simply walk
away from his house if he has the means of paying. If the bank was involved
in predatory lending, or the debtor really can't pay the loan, a stronger case
can be made.
 ‫‪ .6‬ספר הישר חלק החידושים ס' תקח‬ ‫‪ .1‬משפטים כב‪:‬כד‬

‫‪ .2‬בבא מציעא עה‪:‬‬

‫‪ .3‬בבא מציעא קיד‪.‬‬

‫‪ .4‬מש' ערכין כג‪:‬‬

‫‪ .7‬ראבי"ה ס' תתקיט‬

‫‪ .5‬רמב"ם הל' מלוה ולוה א‪:‬ז‬

‫מסדרין לבעל חוב כדרך שמסדרין בערכין‪.‬‬
‫‪ .8‬רמב"ם הל' מלוה ולוה א‪:‬ה‬
‫כיצד אומר ללוה הבא כל המטלטלין שיש לך‬
‫אין בעל חוב גובה לא מכסות אשתו ובניו של‬
‫ולא תניח אפילו מחט אחת ונותנין לו מן הכל‬
‫לוה ולא מבגדים צבועים שצבען לשמן אף על‬
‫מזון ]ל'[ יום וכסות י"ב חדש מכסות הראויה‬
‫פי שעדיין לא לבשו אותן ולא מסנדלים חדשים‬
‫לו‪ .‬ולא שילבש בגדי משי או מצנפת זהובה‬
‫שלקחן לשמן אלא הרי אלו שלהן‪ .‬בד"א בכלי‬
‫אלא מעבירין אותה ממנו ונותנין לו כסות‬
‫החול אבל בגדי שבת והמועד גובה אותן בעל‬
‫הראויה לו לי"ב חדש‪ .‬ומטה לישב עליה ומטה‬
‫חוב ואין צריך לומר אם היו בהן טבעות וכלי‬
‫ומצע הראויין לו לישן עליהם ואם היה עני מטה‬
‫זהב או כסף שהכל לבעל חובו‪.‬‬
‫ומפץ לישן עליו‪ .‬ואין נותנין כלים כאלו לאשתו‬
‫‪ .9‬תלמוד ירושלמי קדושין א‪:‬ד‬ ‫ובניו אע"פ שהוא חייב במזונותיהם‪ .‬ונותנין לו‬
‫סנדליו ותפליו‪ .‬היה אומן נותנין לו שני כלי‬
‫אומנות מכל מין ומין כגון שהיה חרש נותנין לו‬
‫שני מעצדין ושתי מגרות‪ .‬היה לו מין אחד‬
‫מרובה ומין אחד מועט נותנין לו שנים מן‬
‫המרובה וכל שיש לו מן המועט‪ .‬ואין לוקחין לו‬
‫כלים מדמי המרובה‪ .‬היה אכר או חמר אין‬
‫נותנין לו לא צמדו ולא חמורו‪ .‬וכן אם היה ספן‬
‫אין נותנין לו ספינתו אע"פ שאין לו מזונות אלא‬
‫מאלו אין אלו כלים אלא נכסים וימכרו עם‬
‫שאר המטלטלין בבית דין וינתנו לבעל חובו‬
 ‫‪ .11‬מרדכי כתובות ס' קעב‬ ‫מגיד משנה הל' מלוה ולוה א‪:‬ו‬ ‫‪.10‬‬
‫בד"א בכלי חול אבל בגדי שבת והמועד בעל‬
‫חוב גובה אותן‪ .‬חילוק זה שכתב הרב ז"ל לא‬
‫מצאתיו מבואר בשום מקום בדין זה והמשנה‬
‫של ערכין סתם היא שנויה אבל נ"ל שיצא לו‬
‫ז"ל ממה שאמרו פ"ק דב"ק )דף י"א ע"ב(‬
‫האחין שחלקו מה שעליהם שמין ומה שעל‬
‫]נשיהם[ בניהם ובנותיהן אין שמין ואמרו‬
‫בירושלמי בגדים שעל בניהם ושעל בנותיהן‬
‫אין שמין של רגל ושל שבת שמין והביאוהו‬
‫בהלכות וכבר נתבאר דין זה פ"י מהלכות‬
‫נחלות והרב ז"ל דימה דין בעל חוב לחלוקת‬
‫האחים לפי שהכל מטעם אחד שאינו עולה‬
‫בדעת הבעלים להקנות להם בגדים אלו‬
‫המכובדים שהם מיותרים על דעת שלא יוכל‬
‫למכרן ולפיכך נישומין בחלוקת האחין ונגבין‬
‫לבעל חוב זהו דעתו ז"ל וראיתי מי שחלק‬
‫ואמר שאחין הוא בדוקא שאינן מקנין זה‬
‫לאשתו ובניו של זה אלא בגדי חול ומפני שלא‬
‫יפשיטום ערומים אבל בעל לאשתו מקנה הוא‬
‫בין של חול בין של שבת ואם הקדיש והעריך‬
‫עצמו אין לו בכסות אשתו ואפילו של שבת‬
‫כלום ע"כ ויש סעד לחילוק זה מפני שהורע דין‬
‫האחין בצבע שצבעו לשם נשיהם ובניהם שהוא‬
‫נישום בודאי שלא אמרו אלא מה שעל נשיהם‬
‫ובניהם ממש ואילו בעל חוב אינו גובה מהן‬
‫ואפשר שאף בגדי שבת ומועד כן זה נ"ל ואני‬
‫תמה בדברי הרב למה לא כתב חילוק זה פ"ג‬
‫‪ .12‬שלחן ערוך חו"מ צז‪:‬כו‬ ‫מהלכות ערכין וחרמין והביא דין המשנה סתם‬
‫וצ"ע‪.‬‬

‫‪ .13‬סמ"ע צז‪:‬סב‬
‫נראה דר"ל שחולקין אמ"ש שגובין מבגדים של‬
‫שבת ויו"ט‪ ,‬אבל במאי דמסיק שגובין מטבעות וכלי‬
‫זהב לא פליגי‪ ,‬ומטעם הנ"ל ]סקס"א[‪ ,‬ומשו"ה‬
‫סידר מור"ם ובעל תרומות ]שער א' ח"א ס"ז‬
‫עיי"ש[ דעת החולקים ביני ביני והפסיק דברי‬
‫הרמב"ם‪ ,‬שמ"ש לפניו ולאחריו דברי הרמב"ם הוא‬
‫]בפ"א ממלוה ה"ה[‪ ,‬וכ"כ הריב"ש ]בתשובה[ בסי'‬
‫קכ"ח‪ .‬ואף שבדרכי משה ]סעיף מ"ה[ משמע‬
‫דפסק כהמרדכי בפרק נערה שנתפתתה ]כתובות‬
‫סי' קע"ב[ דאפילו מתכשיטין אין גובין‪ ,‬מ"מ נראה‬
‫דכאן בשו"ע הכריע כהריב"ש ]הנ"ל[ הביאו הב"י‬
‫]שם[ על דברי הרמב"ם הללו‪ ,‬ע"ש‪ ,‬ומשמע דס"ל‬
‫כוותיה‪ ,‬ע"ש ודוק‪ .‬ועיין דרישה ]שם[ מה שכתבתי‬
‫עוד מזה‪.‬‬
‫‪ .19‬דברים כד‪:‬יד‪-‬טו‬ ‫‪ .14‬ערוך השלחן חו"מ צז‪:‬ל‬

‫‪ .15‬שו"ת הרשב"א ס' אלף קמג‬

‫‪ .20‬בבא מציעא קיא‪.‬‬

‫‪ .21‬בבא מציעא קי‪:‬‬

‫‪ .16‬תשובות הרמב"ם )מקיצי נרדמים( ס' צו‬

‫‪ .22‬בבא מציעא קיב‪.‬‬

‫‪ .23‬בבא מציעא קיב‪.‬‬

‫‪ .17‬ש"ך חושן משפט צז‪:‬יד‬

‫‪ .18‬ויקרא יט‪:‬יג‬
 ‫‪ .28‬אהבת חסד חלק א' פרק י סע' יא‬ ‫‪ .24‬אהבת חסד חלק א' פרק ט סע' ז‬

‫‪ .29‬שלחן ערוך חו"מ קד‪:‬א‬

‫‪ .30‬שלחן ערוך חו"מ קד‪:‬יג‬

‫‪ .25‬ספר החינוך מצוה תקפח‬

‫‪ .31‬שו"ת מהרי"ק ס' ג‬

‫‪ .26‬מנחת צבי חלק ב' ס' ב'‬

‫‪ .32‬בית יוסף חו"מ ס' צח‬

‫וכתב מהרי"ק בשורש ג' אפילו שמענו‬
‫שנתייאש מהחוב לגמרי ואמר וי לחסרון כיס‬
‫אינו יאוש‪.‬‬

‫‪ .33‬שלחן ערוך חו"מ צח‪:‬א‬

‫‪ .27‬אהבת חסד חלק א' פרק ט' סע' ח‬

‫‪ .34‬רמ"א חו"מ קסג‪:‬ג‬

 ‫‪ .38‬רשב"א שם‬ ‫‪ .35‬שו"ת חכם צבי ס' קמד‬

‫‪ .39‬שלחן ערוך חו"מ סח‪:‬א‬

‫‪ .36‬קצות החושן קסג‪:‬ג‬

‫‪ .40‬גיטין מא‪.‬‬

‫‪ .37‬גיטין י‪:‬‬

‫‪ .41‬ר"ן גיטין כב‪.‬‬

‫‪ .42‬שיעורי הרב למס' גיטין עמ' שכו‬

‫‪ .43‬נתיבות שלום קעג‪:‬ט אות ב‬

‫‪ .44‬כתובות פו‪.‬‬

‫‪ .45‬קצות החושן קד‪:‬ב‬

‫‪ .46‬רמ"א חו"מ שמח‪:‬ב‬