Debt Settlement in Halacha


By Rabbi Baruch M. Levine

We all take on too much. Often customers invest in their businesses with the hope that they will be able to advance only to find that the specific venture was not profitable and they are left with a pile of bills.

Let us take the example of a customer who had fallen on hard times and had outstanding bills to the tune of 25,000 dollars. One day, he came over to the vendor and said that although he didn’t really have any money to pay, he would somehow scrape together 10,000 dollars to pay him if he agreed to accept it as full payment. Afraid that he would otherwise not get paid at all, he agreed to this settlement. He paid the 10,000 dollars and the vendor signed a letter stating that his bill had been settled in full.

A few years later, the customer’s financial situation seems to have improved and the vendor would now like to collect the rest of the outstanding debt. Is there any way one can retract their past agreement to discharge his debt?

Discharge Under Duress

Ordinarily, when one agrees to relinquish his right to a monetary claim, he can no longer retract on the agreement. However the Halacha is that a relinquishment must be done voluntarily. If a relinquishment is done by force or under duress it is not valid. For example, if a debtor tells his lender: “if you don’t discharge my debt I will kill you”, and the lender acquiesces, the discharge is not valid and the debt remains in force. Moreover, even if the debtor only threatens to hurt his lender financially, it is considered an act of force. For example, if the debtor says, “if you don’t discharge my debt I will persuade one of your vendors to cut ties with you”, the discharge will be invalid.

In our case, since the debtor threatened to avoid paying you even the 10,000 dollars that he was capable of paying unless the lender agreed to a settlement, he in effect forced the lender to relinquish part of the debt. Consequently, the settlement is null and void and the lender may require him to pay the remaining balance of his bill.

A Fair Deal

Nevertheless, there is one very important limitation to this Halacha. A relinquishment is only considered as having been done by force if the debtor threatened to act in a way that was not within his Halachic rights. However, if he threatened to act within his Halachic rights, he is not considered as having forced the relinquishment. For example, a debtor who says to his lender, “you may not use my swimming pool unless you discharge my debt”, is not considered to be forcing a discharge since it is fully within his rights to not allow the debtor into his swimming pool. Rather, this is just viewed as a negotiation of a conventional two-way deal; the exchange of swimming pool usage for a debt discharge. Only when the debtor threatens to infringe on the lenders rights in a manner that is beyond his Halachic ability is it considered an act of force.

In this case too, if it was within your debtor’s Halachic right to avoid paying the loan at the time of the settlement yet he did so anyway, then the discharge cannot be considered a forced one but rather part of a conventional two-way deal.

Valid Excuses

When does a debtor have a Halachic right to avoid paying the loan at a specific time? There can be a number of possibilities for this. Firstly, a debtor is often not required to borrow money in order to pay an existing creditor. Therefore, if the debtor indeed did not have the 10,000 dollars and was only able to obtain it through a loan – then he possibly has a right not to pay the lender. Moreover, even if he did have 10,000 dollars but needed it for certain basic imminent necessities, he would not have been required to give it to the lender.

Finally, even if the debtor had 10,000 dollars available to pay towards his debts, yet he had other creditors too, then he was not necessarily required to give it all to that particular lender at the expense of the other creditors. In any of these circumstances pertained to the debtor, then his original payment of 10,000 would be considered to be an act beyond the letter of the law, and thus the associated settlement is not considered a forced one and remains valid. Unfortunately, this would leave the lender with no recourse in collecting the balance of the loan.