Question: A Jewish debtor filed Chapter 5 (bankruptcy). Does the court settlement exempt him also from his Jewish creditors according to halacha?
Answer: Bankruptcy settlements generally entail compromises on the part of the creditors to accept partial payment of their loans. For a compromise to be binding in halacha, it must be accompanied by an act of kinyan (e.g., sudar, handshake, or formal contract) to give it binding status. (C.M. 12:7)
In addition, there is a discussion whether a compromise that was coerced on the other party is valid. (12:11) However, if the person actively took part in the settlement process, this is indication of his agreement to the settlement.
Therefore, only if the creditor made a kinyan and took an active part in the bankruptcy settlement would the borrower be exempt according to halacha. Otherwise, the debt remains, even if a long time passed from the loan. (98:1)
Nonetheless, since the bankruptcy settlement has secular legal status, some maintain that the rule of dina d’malchusa dina applies here. (Igros Moshe C.M. 2:62; see, however, Chelkas Yaakov C.M. #32)
Furthermore, for loans involving businesses, there is an additional consideration of the common commercial practice (minhag hasocharim). Businesses and corporations general lend in accordance with the accepted business practices, so that a loan involving a business would generally be subject to the common commercial practices and prevailing laws. (Pischei Teshuva 12:19; Pischei Choshen, Halva’ah 2:26)
Authored by Rabbi Meir Orlian
These articles are for learning purposes only and cannot be used for final halachic decision.
The Business Halacha email is a project of Business Halacha Institute (www.businesshalacha.com) and is under the auspices of Rav Chaim Kohn.
What is “Chapter 5”?
As far as I know,
it’s generally “Chapter 11”
(reorganization) or
“Chapter 7” (liquidation).