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If someone borrowed money and then declared bankruptcy, does he still have a halachic obligation to pay it back?

  1. If the lender was a corporation (bank, etc.).
  2. If the lender was a friend.

Do we say that "Dina Dmalchusa" declared the loan worthless?

Can one say that since a bank takes bankruptcy into account when giving a loan, bankruptcy was an implicit condition in the loan?

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According to the Melbourne Kollel,

They say that

  1. The Chelkas Yaakov says that Dina Demalchusa Dina does not apply here, as even according to the Rama (who says that Dina Demalchusa Dina applies even in cases which do not benefit the government directly [such as Bankruptcy]) the Dina Demalchusa must benefit the public in some way. Since bankruptcy hurts the public by making people unwilling to give loans, Dina Demalchusa does not apply.

    Moreover, the Shach says that Dina Demalchusa cannot override a commandment of the Torah. Since the Torah obligates one to pay back loans, the government cannot free one from that obligation.

  2. The Pischei Choshen says that the concept of "Minhag Hasochrim" (that when one makes a business transaction with another, it is made under the assumption that one will follow the local customs among merchants) applies only to "company loans" (which take bankruptcy into consideration). However, when taking private loans, one doesn't think of the possibility of bankruptcy so it will not apply.

Therefore,

  • If one took a "company loan" (I assume it means that he borrowed from a bank) he can declare bankruptcy due to the law of "minhag hasochrim".

  • If one took a "personal loan" (I assume it means that he borrowed from a friend) - he cannot declare bankruptcy.

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    Not sure about Australian terminology, but in the States "personal loan" is AFAIK one in which the borrower is an individual, not the lender. +1, though, good find.
    – msh210 ♦
    Commented Apr 27, 2012 at 19:46
  • @msh210 I'm not sure either, but al pi svara it makes sense to see it this way.
    – ertert3terte
    Commented Apr 27, 2012 at 19:53
  • I agree your way makes more sense, but I think the other makes some sense, too (someone lending to a company thinks it may go into bankruptcy sooner than someone lending to an individual). Anyone out there know Australian financial terminology?
    – msh210 ♦
    Commented Apr 27, 2012 at 20:04
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    I don't agree that filing for bankruptcy "hurts" the public because it reduces incentive for lending. If the loan is secured and the security is properly valued, then the lender comes out whole. Unsecured loans compensate for the risk of bankruptcy by charging higher interest. The higher return on such loans, most of which are paid off, benefits the lender and its investors (or depositors) who can receive higher rate of return on their investment. Also, if a person liquidates in bankruptcy, he can't do it again for 7 years. Banks don't hesitate to give loans to the recently bankrupt.
    – Bruce James
    Commented Dec 31, 2012 at 19:57
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1) The answer to your question from Jewish Virtual Library is "maybe".

To expand slightly "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."

2) See also an Aish article which speaks about the effect of the Shmittah year on loans.

3) See also this article from the Jerusalem Post by Rabbi Shlomo Brody of Yeshivat HaKotel with references which is similar to (1).

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