Bankruptcy and Insolvency

The issues

What happens if one becomes bankrupt?
May one refuse to pay debts because of bankruptcy?
Is it acceptable for all the creditors to pursue a common policy with regard to the bankruptcy?
Is there a difference between corporate bankruptcy and personal bankruptcy?

The Jewish Perspective

Bankruptcy is a legal status in which a debtor's assets are held in trust for the benefit of his creditors. A person normally becomes bankrupt when he is unable to discharge his debts, although they may ultimately be repaid. Ultimately the bankruptcy may be discharged and the former bankrupt debtor will no longer be personally liable for debts he had incurred.
From a Jewish perspective the concept of bankruptcy is very different. The Torah considers the obligations to pay debt as absolute. According to the Torah, loans are not simply business propositions; nor are they simply investments. Loans are acts of charity, benevolence and generosity and a borrower has an absolute responsibility to repay those acts of generosity which were extended to him.

Nevertheless there may be circumstances in which, in accordance with Jewish law, bankruptcy would be a viable option. The first is based on commercial custom - minhag hasochrim. It is understood that, when one makes a business agreement with another, this agreement is in accordance with the custom of the land and the accepted practice within that business. It is realised that, on occasion, one may no longer be able to service one's debts. However, for the promotion of trade, the furtherance of economic activity and to enable traders to continue in the practice of their trade even though they may have made a poor business decision, various debt settlement practices have been accepted. Nonetheless, though debts may be discharged under Jewish law, the debtor remains under a moral obligation to repay his debts.

Another reason why one may perceive bankruptcy to be a valid option in Jewish law is that it is understood that business relationships are based on secular law, which incorporates within it the provisions of bankruptcy law. However, if the relationship was predicated on a personal basis and under religious law, recourse to secular bankruptcy law would not be acceptable.