Bankruptcy and the Bible

Biblical Origins of Some of the Concepts in the Bankruptcy Code.

By Laura Margulies

It is surprising how many of the concepts and laws found in today’s Bankruptcy Code can trace their roots to verses in the Bible. For example, the idea of discharging debts, allowing the debtor a “fresh start” and permitting the debtor to retain or exempt certain assets can be found in several places in the Bible. The same is true regarding the concept of helping someone reorganize his debts; retain certain assets from execution, and placing limits on collection activity.

Discharge      

While it is considered a good deed to repay ones debts[1], the Bible recognizes that is not always possible and provides a mechanism for discharging debt. In Deuteronomy 15:1-2 it states:

At the end of seven years you shall institute a release. This is the matter of the release: Every creditor shall release his authority over what he has lent his fellow; he shall not press his fellow or his brother, for He has proclaimed a release for G-d.

A few sentences later in Deuteronomy 15:9-10 it goes on to state:

Beware lest there be a lawless thought in your heart, saying, “The seventh year approaches, the year of release,” and you will look malevolently upon your destitute brother and you will not give him– then he will call out against you to G-d, and there will be sin upon you. Giving, you shall give him, and let your heart not feel bad when you give him,, for because of this matter, G-d, your G-d, will bless you in all your deeds and in your every undertaking.

Just as one was required to let his land remain from farming activity once every seven years[2], so too the poor are made from debt once every seven years. Rashi, the medieval Biblical commentator, explains that the release, “at the end of seven years” means at the end of the Sabbatical year all loans are released at the same time. It does not mean that all loans are always seven years in duration. Rather, if one made a loan in year two of the cycle, the maximum term of the loan would be five years, if one made a loan in year six, the maximum term of the loan would be one year.

The words “he shall not press his fellow or his brother” are to warn lenders against refraining from loaning money to the poor because of the approaching year of the release. Rabbi Shimshon Rafael Hirsh, a nineteenth century Biblical commentator, explains that once the Sabbatical year has passed, the creditor may no longer demand payment for the debt, as it had been legally canceled.  Just as the relief given to the land every seven years is to remind us that G-d is the true owner of the universe,  the relief given to debtors is to remind us that our worldly possession are also part of G-d’s possessions.

What sin is the Bible referring to when it states that if you do not provide a loan to one who needs it, is a “sin upon you?” The commentators explain that if you do not help someone in financial straits, it is as though you are denying the existence of G-d, who sent this person to you. If you keep the money to yourself it is as if you are worshiping money, and is comparable to worshiping idols. The next verse assures the lender that you will actually not lose money by lending it to the poor, rather G-d will make sure your deeds are blessed.

The Bible specifically forbids the creditor from taking action to “press” meaning to collect the debt after the Sabbatical year. It does not indicate that the debtor no longer owes the debt. There remains a moral obligation to pay, but the payment is at the debtor’s discretion after the Sabbatical year. The words “press his fellow or his brother”  are meant to show that both the lender and the borrower are to treat each other like friends and brothers. It will be a matter of honor for the debtor to repay the debt, but it will no longer be a legal obligation.

In my experience, many people want to pay at least some of their  creditors even after they file bankruptcy, these are mostly medical professionals or family members. What I explain is that the bankruptcy discharge  takes away their legal liability to pay their debts, it does not take away their moral responsibility to pay the debts.

Fresh Start

Congress has explained that one of the purposes of bankruptcy is to give the honest debtor a fresh start. In Biblical times if you could not pay your debts, you could become an indentured servant and the wages you would have earned were applied to the debt you owed. However, once you paid off your debt, you were not just set , but were expected to receive enough compensation to allow you to rebuild your life. This idea is expressed in Deuteronomy 15:12-13 which states:

If your brother, a Hebrew man or a Hebrew woman, will be sold to you, he shall serve you for six years, and in the seventh year you shall send him away from you . But when you send him away from you , you shall not send him away empty-handed. Extend, you shall extend to him from your flocks, from your threshing floor, and from your wine pit; with which G-d, your G-d has blessed you, so shall you give him.

Under what circumstances would a person be sold into slavery in ancient times? Rashi explains that if a person was convicted of theft, but could not repay the victim, the court that convicted him could order that he work for the victim for . The amount of time he needed to work for the victim would depend on the amount of the theft, to pay back the value of what he has stolen, but in no event could he remain a slave beyond six years.

After he served his time, he was not expected to be released penniless, empty handed and unable to support himself. The person he worked for was to provide him with sufficient goods and food so that he will be able to earn a living and have enough food to feed his family. When reading the verse “from your flocks, from your threshing floor, and from your wine pit” one might think that these are the only things that need to be given to the former servant, and if one did not have these things, the former servant could be released with nothing. This is not correct, the verse continues requiring that you give the former servant from all “with which G-d, your G-d has blessed you, so shall you give him.”  Meaning that you should give the d servant a grant from all the varieties of property that you own commensurate with the amount with which G-d has blessed you.

Exemptions

Our bankruptcy system was a progressive step forward from the way debtors were treated in the Dark Ages and though the industrial revolution. Today, not only is the debtor  given a discharge, but he is allowed to keep certain assets after the case is filed. The amount of types of assets one can keep are called exemptions. All states allow a debtor to retain some tools of his trade, some amount of furnishings, cash, clothing, etcetera so that he will be able to maintain himself after the case is completed.

Earlier in the Dark Ages, people who owed debts that they could not repay could be drawn and quartered and their body parts distributed to their creditors.[3] The very term “bankruptcy” comes from the words “banca rotta” which means to “break the bench.” Meaning the bench or stall where the merchant operated out of was broken and he could no longer work if he did not repay his debts.[4] While this did punish the debtor, it did little to repay his debts. The Bible understanding the practical consequences of leaving the debtor with no means to earn a livelihood, set forth laws requiring that certain assets be exempt from execution and attachment. In the Bible there were restrictions on the collateral one could take as a guaranty for a loan. For example in Exodus 22:25-26 it states:

If you take your neighbor’s garment as security for a loan, you must return it to him before sunset. This alone is his covering, the garment for his skin. With what shall he sleep? Therefore, if he cries out to me, I will listen, for I am compassionate.

What type of item or items is the Bible referring to?  Biblical commentators believe that “His covering” refers to his coat, the “garment‘ refers to his shirt, “with what shall he sleep” refers to his blanket. These items must be returned night after night. Just as G-d lets you wake up morning after morning and is compassionate to you, so too you must show compassion to the debtor and return those items night after night as he needs these items to sleep every night. In addition to the items needed for someone to sleep at night, the Bible has another restriction on collateral. In Deuteronomy 24:6 we find the following admonition:

Do not take an upper or lower millstone as security for a loan, since that is like taking a life as security.

While the Bible does allow creditors to take collateral as security for a loan and retain the collateral if the debtor did not repay the loan, certain items were forbidden to be taken as collateral.  These items included tools that were needed by the debtor to sustain him, like having a functioning mill so he could make bread.  Applying these verses, it was determined that a creditor could take clothing from a debtor but was required to leave the debtor with enough clothing for a year. He could take food, but must leave enough food for 30 days. He may not take the debtor’s bed, mattress or linens and if he is a workman, the debtor gets to keep tools of his trade.[5]

Reorganization

The Bankruptcy Code in Chapters 11 and 13 allow businesses and individuals the opportunity to reorganize their debts so that the business can continue operations and the person can continue to earn a livelihood. In the Bible we are advised to assist people who are struggling financially and help them before they get too far behind in their bills. In Leviticus: 25:35-37 it states:

If your fellow among you becomes needy, and his hands become shaky in your presence, you shall support him, even if he is a convert or a resident alien, so that he can live with you. You should not take interest and increase from him. While this may be difficult for you, you should fear G-d- and help your fellow live with you. You should not lend him your money with interest, nor should you lend your food with interest.

The term “support him?” has been interpreted to mean do not let him decline and fall, as it will be difficult to raise him up. Rather, from the time his fortune begins to take a turn for the worse, you need to assist him so that he can recover. The Bible does not state that the person is in a life threatening condition.  At this point the person just has shaky hands, meaning that his ability to earn his livelihood has begun to fail. The assistance that you provide him at this point will enable him to continue to conduct his business independently.

In reorganization cases, unlike Chapter 7 liquidation cases, the debtor maintains hope that with a little breathing time from his creditors, he will be able to reorganize his debts and continue to operate his business. When filing a Chapter 11 case for example, the business may be on shaky financial ground, but when the reorganization plan gets approved, the business should now be able to move forward towards full financial recovery.

The Bible then admonishes the lender not to collect interest on the loan that he made to the borrower while the debtor was on shaky ground.  It is enough for the borrower to have to repay the entire loan, it would be too much for the lender to profit from the loan by collecting interest on it.  Just as we are reminded that the land and its produce belong to G-d during the Sabbatical year, the law regarding interest is to remind us that money is also the domain of G-d. Another reason given for forbidding interest is to discourage laziness. The act of lending money and collecting interest requires no physical effort on the part of the lender. He merely loans money and waits for the time for the loan to be repaid and at the time of repayment he makes a profit. G-d gave man laws that require tremendous effort. Biblical scholars suggest that the Bible wants people to profit as a result of hard work and not the result of making someone else work harder.

In the New Testament, it seems that Jesus also did not like the charging of interest. Some people who came to the Temple to worship traveled great distances from their country of origin. They had the currency from their country and needed to exchange the currency in order to purchase goods in Jerusalem. It seems that these money changers charged interest to these pilgrims, as it it states in Mark 11:15-16

And they come to Jerusalem: and Jesus went into the temple, and began to cast out them that sold and bought in the temple, and overthrew the tables of the moneychangers, and the seats of them that sold doves.

Automatic Stay- Fair Debt Collection Practices Act

One of the main benefits of filing bankruptcy is the automatic stay provision. This statute requires that all creditors cease all collection activity the moment the bankruptcy case is filed. Another federal law, the federal Fair Debt Collection Practices Act, places certain restrictions on collection activities of creditors, such as refraining from telephoning the debtor in the evenings or making certain threats such as telling the debtor that if he does not pay he could go to jail. Again, the source of these restrictions can be found in the Bible. In Exodus 22:24 it provides that:

When you lend money to my people, to the poor among you, do not press him for repayment. Also, do not take interest from him.

Press him for repayment “ has been interpreted to mean that the creditors cannot demand the return of the money by force. If the creditor knows that the debtor does not have the money, he should appear in his attitude towards him as though he had lent it to him, but appear as though he did not lend it to him, i.e., do not put him to shame. The word used for “interest” in this verse in Hebrew is Neshech. It is similar to the Hebrew word Nachash, which means snake. Just as a snake bite makes a small wound in one’s foot, which one may not initially even feel, it can later swell and the swelling can go all the way to one’s head. This is similar to interest, where it is not even noticed initially until it increases and causes the borrower to lose much money. Later in the Bible in  Deuteronomy 24:10-11 there is a further restriction:

If you become your fellow’s creditor for any amount of debt, do not enter his house to take something as security. You must stand outside and the man from whom you are claiming shall bring the security outside to you.

Rabbi Hirsh explains that the Bible is describing a situation where the debtor defaulted on a loan which became due, and the lender is seeking the collateral that secured the loan.  In such a case, the lender may not enter the debtor’s house to collect the collateral. Rather, he is to wait “outside” for the debtor to bring the collateral to him. Another interpretation of the word “outside” is that he must wait for the court, which consists of outsiders (disinterested parties) to render a decision that the lender is owed the money and if not paid, the lender may be entitled to the collateral pledged for the loan. However, under no circumstances could the lender resort to self help.

Conclusion

While we can pride ourselves for our progressive treatment of debtors under  the Bankruptcy Code, as we have seen, many of these concepts are very old and came from the Bible. According to the Bible, society as a whole is expected to help those who have fallen on hard times. Many restrictions are placed on lenders to ensure that the poor are treated with dignity and respect. Even an indentured servant is not expected to be let go without providing him with provisions to ensure his financial security in the future. The very concept of a discharge of debt is part of the Biblical tradition.

Laura Margulies is a bankruptcy lawyer in Maryland and can be reached via email at Laura@law-margulies.com.

 

[1]  Biblical scholars interpret the phrases “treat others as you would like to be treated,” and “love your neighbor as yourself” as requiring one to pay his debts. See Babylonian Talmud Ketubot 86a.

[2] See Leviticus 25:2-5.

[3] Countryman, Bankruptcy and the Individual Debtor- and a Modest Proposal to Return to the Seventeenth Century, 32 Cath. U. L. Rev. 809, n. 6 (1983); Radin, 5 Ency. Soc. Sci. n.7 (1931); Ford, Imprisonment for Debt, 25 Mich. L. Rev. 24 n.7 (1926).

[4] Countryman, supra, n.6 at 810.

[5] Code of Jewish Law, Choshen Mishpat.