The Kosher Way to Collect a Loan

Although it is a very big mitzvah to lend money, some people are reluctant to do so because they know of loans that proved difficult to collect. Must you lend someone money if you are not sure it will ever be repaid? What do you do if you lent money to someone who seemed very honest and sincere, but now that it comes time to repay, he informs you that he is penniless? What may you do and what may you not do to collect your money? How can you guarantee that you get your money back?

Our goal this week is to address these questions.

THE MITZVAH OF LENDING MONEY

The Torah requires us to lend money to a poor Jew who needs it (Rambam, Hilchos Malveh 1:1). This is stated in the pasuk, “Im kesef talveh es ami, es he’ani imach – When you lend money to My people, to the poor person among you” (Shemos 22:24). Chazal explain that the word “Im” in this pasuk should not be translated as “If,” which implies that it is optional, but as a commandment, “When you lend…” (Mechilta). Poskim even discuss whether we recite a bracha on this mitzvah, just as we recite one on tefillin, mezuzah and other mitzvos (Shu”t HaRashba #18). Although the halacha is that we do not recite a bracha, the question itself shows us the importance of the mitzvah of lending money.

It is a greater mitzvah to lend someone money, which maintains his self-dignity, than it is to give him tzedakah, which is demeaning (Rambam, Hilchos Malveh 1:1). There is a special bracha from Hashem to people who lend money to the poor.

I should not become upset if a poor person returns to borrow money from me shortly after repaying a previous loan. My attitude should be similar to a storekeeper: “Do I become angry with a repeat customer? Do I feel that he is constantly bothering me?” Similarly, one should not turn people away without a loan, but rather view it as a new opportunity to perform a mitzvah and to receive additional brachos (Ahavas Chesed 1:7).

One should also lend money to wealthy people who need a loan, but this is not as great a mitzvah as lending to the poor.

Someone with limited available funds and has requests for loans from family members and non-family members, and cannot lend to both, should lend to family members. Similarly, if he must choose to whom to lend, he should lend to a closer family member rather than to a more distant one.

By the way, one may lend money to a poor person with the understanding that if the borrower defaults, the lender will subtract the sum from his tzedakahmaaser calculation (Pischei Choshen, Volume 1, p. 4).

WHAT IF I KNOW THE BORROWER IS A DEADBEAT?

I am not required to lend money if I know that the borrower squanders money and does not repay (Shulchan Aruch, Choshen Mishpat 97:4). It is better not to lend if I know that the borrower will squander the money and probably not pay it back.

THE RESPONSIBILITIES OF THE BORROWER

Someone who borrows money must make sure to pay it back. One may not borrow money that he does not think he will be able to repay. A person who squanders money and therefore does not repay his loans is called a rasha (Rambam, Hilchos Malveh 1:3).

The borrower is required to pay his loans on time. If his loan is due and he cannot pay them, he is required to use his household items, if necessary, to pay his debt (Nesivos 86:2; Graz, Hilchos Halvaah 1:5). Similarly, he may not make significant contributions to tzedakah (Sefer Chassidim #454). He may not purchase a lulav and esrog if he owes money that is due; instead, he should borrow someone else’s (see Pischei Teshuvah, Choshen Mishpat 97:8). He must use whatever money he has available to pay his debts.

It is strictly forbidden to pretend that he does not have money to pay his debts or even to delay paying them if he does have the money, and it is similarly forbidden for him to hide money so that the lender cannot collect. All this is true even if the lender is very wealthy.

COLLECTING BAD DEBTS

Most people who borrow are careful to repay their debts and do so on time. However, it happens occasionally that someone who intended to pay back on time is faced with circumstances that make it difficult for him to repay.

There is a prohibition in the Torah, “Lo siheyeh lo k’nosheh – Do not behave to him like a creditor” (Shemos 22:24). Included in this prohibition is that it is forbidden to demand payment from a Jew when I know that he cannot pay (Rambam, Hilchos Malveh 1:2). The lender may not even stand in front of the borrower in a way that might embarrass or intimidate him (Gemara Bava Metzia 75b; Rambam, Hilchos Malveh 1:3).

However, if the lender knows that the borrower has resources that he does not want to sell, such as his house, his car, or his furniture, he may hassle the borrower since the borrower is halachically required to sell these properties in order to pay his loan. (See Shulchan Aruch, Choshen Mishpat 97:23 for a list of which items he must sell to pay his debt.) Furthermore, the lender may sue in beis din for the right to collect these items as payment.

(Technically, it is not the borrower’s responsibility to sell the items and bring the cash to the lender; he may give the items to the lender as payment. The lender must then get a beis din or a panel of three experts to evaluate the property he has received. If he needs to hire experts to make the evaluation, the expenses are added to the debt. Of course, the lender and borrower can agree to whatever terms are mutually acceptable without involving expert evaluation, provided that no ribbis [interest] prohibition is created. The vast subject of ribbis is beyond the scope of this article.)

The borrower is in a very unenviable position. He owes money that he would like to pay, but he is overwhelmed with expenses and he simply does not earn enough money to pay all his creditors. He knows he could sell his house or his furniture to pay up, but he really does not want to do that to his family. He should try to appease the lender in whatever way he can (for example, by asking for an extension) and he should certainly try to find other sources of income and figure out how to trim his expenses. But he should realize that he is obligated even to sell his household goods to pay his creditors. Someone who uses his money to purchase items that are not absolutely essential instead of paying back money that is overdue demonstrates a lack of understanding of the Torah’s priorities.

The lender may not enter the borrower’s house to seize collateral or payment. Some poskim contend that the lender may seize property that is not in the borrower’s house or on his person (see Pischei Choshen, Vol. 1, pg. 96). Furthermore, there are poskim who rule that if the borrower has the means to pay but isn’t paying, the lender may enter the borrower’s house and take whatever he can (Shu”t Imrei Binah, Dinei Geviyas Chov chapter 2; Pischei Choshen, Vol. 1, p. 100). One should not rely on this approach without first asking a shaylah.

If the borrower claims that he has absolutely nothing to pay with, the beis din can require him to swear an oath to that effect (Rambam, Hilchos Malveh 2:2).

A lender who feels that the borrower is hiding money or property may not take the law into his own hands to collect, but may file a claim in beis din. If the lender feels that the borrower will not submit to beis din’s authority, he should ask the beis din for authorization to sue in secular courts – but it is forbidden for him to sue in a secular court without first receiving halachic approval.

HOW CAN I GUARANTEE THAT I GET MY MONEY BACK?

As most of us have no doubt experienced at one time or another, it is not pleasant to be owed money that is not repaid. The lender is entitled to be repaid.

Is there a way that I can lend money and guarantee that I get in back?

First of all, the lender must make sure that he can prove the loan took place. This is actually a halacha; it is forbidden to lend money without witnesses or other proof because of concern that this may cause the borrower to sin by denying that the loan exists (Bava Metzia 75b).

All of this is protection only against a borrower denying that he borrowed, which is fortunately a rare occurrence. What we want to explore is ways that the lender can fulfill his mitzvah of lending to a needy person while making sure that the loan does not become permanent.

CO-SIGNERS

The most common method used to guarantee the repayment of a loan is by having someone with reliable finances and reputation co-sign for the loan. In halacha, this person is called an areiv. In common practice, if the borrower defaults, the lender notifies the co-signer that he intends to collect the debt. Usually what happens is that when the lender calls the co-signer, suddenly the borrower shows up at the door with the money.

There are several types of areiv recognized by halacha. The most common type, a standard co-signer, is obligated to pay back the debt, but only after one has attempted to collect from the borrower. If the borrower does not pay because he has no cash, but he has property, the areiv can legitimately claim that he is not responsible to pay. The lender would need to summon the borrower and the areiv to beis din in order to begin payment procedures. Most people who lend money prefer to avoid the tediousness this involves.

One can avoid some of this problem by having the co-signer sign as an areiv kablan. This is a stronger type of co-signing, whereby the lender has the right to make the claim against the co-signer without suing the borrower first.

The primary difficulty with this approach is that it might make it difficult for the borrower to receive his loan, since many potential co-signers do not want to commit themselves to be an areiv kablan.

ANOTHER APPROACH

Is there another possibility whereby one can still provide the chesed to the potential borrower and yet guarantee that the money returns?

Indeed there is. The Chofetz Chayim (Ahavas Chesed 1:8) suggests that if you are concerned that the proposed borrower may default, you can insist on receiving collateral – a mashkon to guarantee payment.

Having a loan collateralized is a fairly secure way of guaranteeing that the loan is repaid, but it is not totally hassle-free. There are three drawbacks that might result from using a mashkon to guarantee the repayment of the loan. They are:

1. Responsibility for the mashkon.

2. Evaluation of the mashkon.

3. Converting the mashkon into cash.

1. Responsibility for the mashkon.

When the lender receives the mashkon, he becomes responsible to take care of it. If it is lost or stolen, the value of the collateral will be subtracted from the loan (Shulchan Aruch, Choshen Mishpat 72:2). If the collateral is worth more than the loan, the lender might be required to compensate the borrower for the difference. (See dispute between Shulchan Aruch and Rama, ibid.) However, the creditor is not responsible for the mashkon if it is lost or damaged because of something that halacha considers beyond his responsibility.

2. Evaluation of the mashkon.

When keeping the collateral to collect the debt, the mashkon must either be evaluated by a panel of three experts before it can be sold (Shulchan Aruch, Choshen Mishpat 73:15 and Ketzos), or must be sold with the involvement of beis din (Shach), to protect the borrower’s rights. Some creditors find this step tedious.

However, there are methods whereby one can use a mashkon to guarantee a loan and avoid having the mashkon evaluated afterward.

When arranging the loan, the lender tells the borrower of the following condition: If the loan is not paid when due, the buyer agrees to rely on the lender’s evaluation of its worth (Pischei Choshen, Vol. 1, pg. 145).

An alternative is for the lender to tell the borrower: If you do not pay by the day the loan is due, then retroactively this is not a loan but a sale. At that point, the collateral becomes mine in exchange for the value of the loan. This is permitted even if the mashkon is worth far more than the loan, and does not involve any violation of ribbis (prohibited charging of interest), since, retroactively, a sale took place rather than a loan (Shulchan Aruch, Choshen Mishpat 73:17).

3. Converting the mashkon into cash.

PROPER ATTITUDE TOWARD THE MITZVAH

At times, lenders have asked me for a method whereby they can be certain to get their money back, and I have suggested the collateral method. Sometimes I receive the following response: I don’t want to be bothered with selling the mashkon to get my money back. If I think the borrower is a risk, then I would rather not lend to him.

Do we have the same attitude toward other mitzvos we perform? Do we say that we want to perform mitzvos only when they are without complications? Certainly not! However, the yetzer hora convinces us that lending money is a good deed that I need to perform only when it is convenient and when I feel like being benevolent, not when it is going to result in a hassle.

SHLEMIEL, THE BORROWER

Nachman once came to me with the following shaylah:

Shlemiel used to borrow money from Nachman regularly, and although Shlemiel always repaid the loan, he often did so long after the due date. Nachman wanted to know what he could do about this situation. He wanted to perform the tremendous mitzvah of lending money, but he wanted his money back in a reasonable time.

I suggested to Nachman that he tell Shlemiel that the loan was available, but only if Shlemiel produced a mashkon and agreed to the above conditions. Since my suggestion, Nachman has been zocheh to fulfill the mitzvah of lending money to Shlemiel many times, and not once has a repayment been late! Think of how many brochos Nachman has received from Hashem because he is willing to subject himself to the “hassle” of transporting the mashkon to a secure place and being willing to sell it should the need arise!

Why do people view loaning money as an optional “good deed” rather than as a commandment? The Chofetz Chayim (Ahavas Chesed 2:8) raises this question and mentions several excuses people make to avoid lending money. After listing these reasons, the Chofetz Chayim proceeds to refute each one of them. Simply put, the answer to this question is the old Yiddish expression, “Ven es kumt tzu gelt, iz an andere velt – When people deal with their money, they tend to act totally differently.” Truthfully, people find it difficult to part with their money, even temporarily. This is precisely why one receives such immense reward for lending. As Chazal teach us, “lefum tzaara agra – the reward is commensurate to the difficulties involved.”

Tidbits of Interest

Some Aspects of the Halachos of Ribbis

Question #1: Small Thanks

“May I give a small present of thanks to someone who helped me out with a loan?”

Question #2: Doing a chesed

“Can I violate ribbis by doing a chesed?”

Question #3: Lending my Credit Card

“How can you violate ribbis by letting someone use your credit card?”

There are a total of six different prohibitions that can be violated when creating and paying a loan in which there is interest. Someone who loans money for interest is in violation of the Torah’s prohibition, even before any interest is, indeed, charged or collected (see Bava Metzia 62a; Shu”t Mahar”a Sasson #162).

According to the Mishnah, not only do the borrower and the lender violate the prohibition against ribbis, but the witnesses to the loan, the co-signer on the loan and the scribe who writes up the loan document are also in violation of the prohibition (Bava Metzia 75b). Thus, anyone causing the loan to be finalized is in violation of this mitzvah. This would include someone who notarizes a loan document that includes a ribbis provision, and might even include a lawyer who draws up a document that includes provisions for ribbis (Bris Yehudah 1:6).

The halachos of ribbis are quite complex, and a review of some of the halachos is always in order. From my experience, even seasoned Torah scholars make mistakes about these halachos and may even have business activities that violate the prohibition of ribbis. What makes these matters even more regrettable is that virtually every one of these situations can be alleviated easily by usage of a heter iska, which will be explained later in this article.

Chazal were so concerned that someone would violate the prohibition of ribbis that they wanted the lender to gain no perceived advantages from the loan, even when the gains are completely of a non-monetary nature. Thus, the lender may not ask the borrower to do him a favor that he would not have asked had he not loaned him money (Tosafos, Bava Metzia 64b s.v. Avol). Similarly, the borrower may not invite the lender to his simcha, if he would not have invited him otherwise.  It is even prohibited for the borrower to thank the lender for the loan (Graz, Hilchos Ribbis #9).

Chazal also prohibited ribbis that occurs before or after the loan exists. For example, it is prohibited for the borrower to bring a small gift to the lender, as a token of thanks for the loan (Mishnah Bava Metzia 75b). This is prohibited, even after the loan has been paid off, and even many years later.

Ribbis Without a Loan

The halacha prohibits charging for the use of one’s money, even when a loan did not actually take place. Thus, a merchant may not add interest charges to a bill (sent to a Jew), because it is past due. He is permitted to bill for the actual expenses accrued due to his having had to send an additional bill, as well as any other collection costs he incurs. However, the merchant may not add service charges because he was forced to borrow money off his credit line to cover the shortfall.

The prohibition against charging for delay of payment also applies to acquisitions. Thus, a store may not charge one price for cash and a different price for credit or delayed payment.

The borrower may pay a co-signer to guarantee a gemach loan. In a situation where the borrower defaults and the co-signer has to pay off the loan, the co-signer may collect what he paid from the borrower (Taz to Yoreh Deah 170:3).

Neighborly Loans

When neighbors borrow small items such as flour, sugar, or eggs, a loan has taken place. They may not intentionally return more than was borrowed, which would be considered ribbis. However, if they are uncertain exactly how much flour or sugar they borrowed, they are permitted to return enough to be certain that they have definitely returned as much as they borrowed (see Bava Metzia 75a). One may return an item that is similar, but not identical, to what was borrowed, if the buyer and seller are not concerned about the difference. Thus, one who borrowed a loaf of bread of one brand need not be concerned whether the loaf of bread that he returns is the same brand or the identical size (Rema, Yoreh Deah 162:1). Similarly, one need not be concerned that the price may have fluctuated in the interim (Shaar HaTziyun 450:4). .

Ribbis Without any Benefit to the Lender

The Torah prohibits ribbis if the borrower pays more than he borrowed, even when no benefit is gained by the lender.

An actual case will show us how people can be guilty of this violation without realizing it. Reuvain is involved in many chesed projects, including raising money for tzedakah. Yankel had an excellent business opportunity and asked Reuvain to help him finance his new endeavor, of course in a permitted fashion. Reuvain decided that he would rather utilize this opportunity for a different mitzvah. He tells Yankel, “Instead of becoming a partner in your business, I will lend you the money interest free, but I’d like to make a condition that some of the maaser from the profits goes to support a yeshiva.”

Reuvain assumes that by making the arrangements this way, he fulfills the mitzvah of lending someone money, which, indeed, is a big mitzvah of chesed, and, in addition, he will be causing someone else to give tzedakah, which is also a tremendous mitzvah. Unfortunately for both Reuvain and Yaakov, since giving the tzedakah was a condition of the loan, this arrangement incurs a Biblical prohibition of ribbis. Although the lender, Reuvain, does not gain from the loan, since a condition of the loan was that Yankel pay more money than he borrowed, this is considered a Torah violation of ribbis (Rema, Yoreh Deah 160:14). (In this instance, there would be no violation of ribbis if he asked Yankel as a favor to donate to the tzedakah cause. Alternatively, they could arrange some form of heter iska, as will be explained later.)

Borrowing Credit or Credit Cards

Here is another instance that occurs frequently, in which people wish to do a tremendous chesed but in reality they are involved in a serious infraction of ribbis. Mrs. Friedman and Mrs. Goldstein meet at a closeout sale where top quality mattresses are available at an unbelievable price. Members of Mrs. Friedman’s family need new mattresses, and she realizes that by purchasing them at the closeout prices she will be saving hundreds of dollars.

Unfortunately, Mrs. Friedman does not have the money to purchase the mattresses, nor does she have any credit cards at her disposal. As she is bemoaning the fact that she will have to forgo this opportunity to save so much money, Mrs. Goldstein, always eager to do a chesed, offers Mrs. Friedman to charge the mattresses on her credit card. A very grateful Mrs. Friedman gladly takes up the opportunity and purchases the mattresses. Her intention is to make the credit card payments accrued to Mrs. Goldstein’s card until she can pay off the balance and interest for the mattresses.

Without either lady realizing it, they have now created a major halachic problem. The credit card company did not lend the money to Mrs. Friedman, but to Mrs. Goldstein, whose name is on the card. For this reason, what has transpired here is that two loans have taken place, both with interest: one from the credit card company to Mrs. Goldstein, and a second from Mrs. Goldstein to Mrs. Friedman. If Mrs. Friedman makes payments directly to the credit card company, she will be repaying Mrs. Goldstein’s loan to the credit company and her own loan to Mrs. Goldstein simultaneously. Thus, she is now paying her loan to Mrs.Goldstein with interest and  both well-meaning ladies will have violated the laws against ribbis (Shulchan Aruch Yoreh Deah 168:17). The parties involved should immediately consult a halachic authority who understands the halachos of ribbis well, since there are several ways that the situation described above can be rectified. (The different ways to alleviate the problem might depend on the individual’s circumstances, and are beyond the scope and length of this article.)

A similar problem often happens in a business partnership, in which one partner has access to a credit line and borrows money from the credit line for the benefit of the business. Since the credit line is in his name and not that of the business, without realizing it, he has borrowed money from the bank and then loaned it to the business, in which he is only one partner. Thus, he is now considered to be charging his partners for interest on a loan he has made to them. Again, this problem can be alleviated with a heter iska.

What is a heter iska?

A heter iska is a halachically approved way of restructuring a loan or debt so that it is some form of business deal that is not a loan. There are numerous ways of making a heter iska, and, indeed, different situations call for different types of heter iska. It is important for everyone who is involved in any type of business dealings to understand the fundamental principle of every heter iska: That a heter iska restructures the loan so that it is an investment or acquisition, rather than a loan.

Borrowing from Jewish-owned banks

Many people borrow money from banks, mortgage companies, credit card companies (including stores), brokerages, and credit unions, without verifying whether they are owned by a Jewish controlling interest. Without using a heter iska, it is forbidden to borrow money with interest from any Jewish-owned business, even if it is incorporated. Although there are some poskim who permit lending money to a corporation without a heter iska, as will be explained later in this article, this author is unaware of any posek who permits borrowing from a Jewish-owned corporation, without a heter iska.

Corporations

Rav Moshe Feinstein ruled that it is permitted to lend money to a Jewish-owned corporation, without incurring a problem of ribbis. In Rav Moshe’s opinion, a loan must have an individual who is responsible to pay for it. When a corporation borrows, no individual is responsible to pay for the loan. Therefore, Rav Moshe contends that a loan to a corporation does not incur the prohibition of ribbis, provided that no individual personally guarantees the loan (Shu”t Igros Moshe, Yoreh Deah 2:63). It should be noted that many other poskim do not agree with this lenience of Rav Moshe, contending that there can be ribbis even when a corporation borrows money (see extensive discussion in Bris Yehudah pg. 138). One practical difference is that, according to Rav Moshe, it is permitted to have a savings account in a Jewish-owned bank without having a heter iska, whereas, according to the other opinions, it is forbidden. However, according to all opinions it is forbidden to borrow from a Jewish-owned bank, credit union or brokerage without a heter iska. Thus, one may not buy stocks on margin from a Jewish-owned brokerage without a heter iska.

Hashkafah of Ribbis

The mitzvah of Ribbis poses an interesting hashkafah question. Why does the Torah forbid making a profit from my money? The Torah encourages earning a livelihood, so what is wrong with earning a profit from lending out money?

Many answers are offered to this question. Kli Yakar presents the following approach: When a farmer plows and plants his field, he knows well that if it does not rain sufficiently or if a blight attacks his crop, he will have nothing to show for his efforts. Thus, even with all his hishtadlus, he knows that he must daven for Hashem to help his efforts. Similarly, a person who opens a business knows well that even with all his planning, his business may not be successful. Thus, he also knows that he must daven for Hashem to help his efforts. However, someone who makes his parnasah from lending out money seems to have his entire livelihood totally secure. He has no daily reminder forcing him to pray for his daily livelihood. For this reason, explains the Kli Yakar, Hashem did not want a person to make his livelihood this way. By banning this method of parnasah, the Torah forced a person to make parnasah in a way that he must be reminded daily of his need for Hashem’s help.

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