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.”