The Torah establishes very specific laws regarding the conduct to be followed when lending money, under which conditions repayment may be claimed, and on the other hand, the duty to repay loans punctually. Unfortunately,all these matters have today fallen into neglect.
It is an important commandment to grant a loan to someone in need, for the maximum amount of possible time, and this constitutes a Mitzvah even greater than charity itself. This is written in "Im Kesef talve et ami" (when you lend money to my people) (Shemot 22.24) Even if a person of means requires the loan (perhaps because he is having some difficulty with his financial liquidity) this situation is included in the commandment, together with giving him brotherly support and adequate advice. (Sh.A.J.M. 97:1) This Mitzvah is of such importance, that if someone is studying Torah and there is no other person able or willing to grant the loan, he must interrupt his study to settle this matter. The lending of objects is not considered to be a specific and individual Mitzvah, but it is included in the general Mitzvah of generosity.
The Mitzvah to loan money is even greater than the one of Tzedaka, because a person tends to be much less uncomfortable when he receives a loan, than when he receives Tzedaka. Furthermore, by granting a loan, one can help the receiver to maintain control over his investments, and this may give him the chance to regain the capability of standing on his own two feet, without the need to accept charity from others. What are the rules and consequences of this Mitzvah?
If two persons come forward to ask for a loan and only one request can be fulfilled ,it must be granted to the poorest person.
In general terms, a relative has priority over other people, if both candidates are of equal means, and even if one of them is a Talmid Jajam (Torah scholar). Nevertheles, if the relative is rich, and the other person is poor, priority must be given to the latter. Furthermore, if someone is aware that his relative is able to borrow from another source, and the other person has no other alternative, the latter has priority, even if the relative is poor.
The Halaja states that the preference of a relative over other candidates is only valid when someone's own money is offered. If one must choose between lending money to a jew (where one is not allowed to charge interest) or to a gentile (with the aim to make a profit), one must give preference to his fellow jew, unless the amount of profit is substantial. (What is meant by a substantial profit is not clearly defined).
The manager of a fund may not give priority to a relative over other candidates. The loans must be offered to all candidates on the same conditions either on a first come first served basis, or according to necessities, following the rules established by the fund. This applies even when the manager created the fund, and even if he personally donated a large sum from his own capital to do so.
If a large number of candidates come forward, and one of them requires a very large sum, which, if satisfied will prevent the granting of the other loans, it is preferable to distribute the available capital between a number of candidates, rather than to give it to an individual. Nevertheless, if the latter requires the funds to avert financial disaster, and the other people need the funds to increase their cash flow and enjoy a more comfortable financial situation, priority must be given to the person in distress.
If someone told his fellow that he would lend him money or objects, or if he decided to separate a percentage of his income to start a fund to grant interest free loans (Gmaj) it is as if he has given an oath to that effect, and he is forbidden to go back on his word.
If the lender knows that there is no chance of recovering his debt, it is preferable not to grant the loan,rather than violate the decree "you shall not be an oppressor to him" everytime payment is demanded.(Sh.A.J.M.97:4)
The lender is entitled to demand adequate guarantees to ensure the punctual repayment of his loan. If he is not satisfied with the guarantees being offered, he is not obliged to lend, even if the receiver is poor.
The Mitzvah of granting loans is limited to whatever money is available (even if it is in a safe deposit box at the bank) , but one is not compelled to borrow from a third party in order to acquire funds ,and be able to fulfill this Mitzvah.
Moreover, unless a buyer is a person in need, one is not obliged to sell to him merchandise on a credit basis. One is not allowed to grant a loan based on funds which have been entrusted to him as a custodian. It is essential for person in this situation to bear in mind that all his actions must be L'sem Shamaim. (Without any personal interest)
Is the presence of formal witnesses, and the drawing of a contract necessary when lending money? the sages have prohibited to lend money without the presence of witnesses or without a contract signed by witnesses. Nowadays, the common practice is for a witness to be present during the transaction or for the borrower to draw a handwritten note, sometimes bearing only his signature, stating that he has asked and received the funds from the financial institution. It is also sufficient for the borrower to give some type of guarantee of restitution, such as a postdated check or some other element of equal or superior value to the loan. If these conditions are not met, even nowadays, the loan should not be granted.
The prohibition is valid even if the borrower s a Talmid Jajam (Torah scholar), or even if the borrower is a wealthy person, and the possibility of default does not exist. However, if the lender knows that the borrower is a G-d fearing person, who would never lie, and even if the borrower would eventually deny the loan, he would forgive the debt without appealing to the Beit Din then, if necessary, the money could be lent without witnesses, checks or guarantees. However, even in this case, it is preferable to follow the rulings of our sages. It is appropiate for all agreements and obligations to be put in writing and signed, even if the parties concerned are good friends or relatives. The contract must be as detailed as possible. This should be done even if one of the parties considers this to be a lack of trust.
Therefore, all agreements regarding employment, contracts or the buying or renting of goods etc. should be put in writing, with full details and conditions, in a clear and explicit manner. This is to avoid any friction or financial claims which may arise, due to misunderstandings or communication faults, and to ensure that the original terms are not forgotten.
It is forbidden to demand payment when the borrower does not have the means to pay and the prohibition "you shall not be an opressor to him", (and also) ,you shall not urge him".- Rashi , Bava Metzia 59.
It is only forbidden to demand repayment if the lender is aware that the borrower is unable to pay, and to claim payment will only cause him aggravation.
However, the lender is allowed to ask the borrower for payment when the loan has matured.
In principle, one does not need to be concerned wether the borrower does not have the means, or goods which could be sold to repay the debt. This is especially true if the lender believes that the borrower may have forgotten to repay the debt.
If the lender demands payment, and the borrower answers that he does not have the funds at this time, the lender may doubt his word and continue demanding payment until adequate proof is presented before the Beit Din.
Moreover, if the lender notices that the borrower is squandering the money lent, and will therefore not have the funds to repay the loan when the date arrives, he can summon him to the Beit Din even before maturity.
Also, if the lender is convinced that the borrower does not have the money to repay him, he is allowed to demand payment if the borrower is in possession of goods which may be sold. However, this is valid only if after selling the assets to repay the debt, he will have enough funds left to cover his basic living expenses, and his housing.
If the lender knows that the borrower has some possibility of responding, he would not breach the prohibition. (Gra"z, Hiljot Halvaa 13). If in doubt, he should consult a Rabbi (see Kesef haKodashim 97 at the beginning, Minjat Jinuj Mitzvah 67, Pele loetz secc."loans",Shevet haLevi volume 10,267)
The lender is not even allowed to present himself before the borrower, because this will shame him and cause suffering, because he knows he does not have the means for repayment. This prohibition applies even when the lender did not lend from his personal funds, but acted only as the manager of a Gmaj (fund established with the purpose of granting interest free loans) who serves the general public.
However, if they do meet under circumstances which will not cause suffering to the borrower, and providing that the lender has no intention of humiliating him, the prohibition to meet does not apply.(Aruj haShuljan 97:3). All this applies only to debts originated from loans, and not to those derived from sales on credit, damages, etc.
According to the Torah, the borrower is not compelled to borrow in order to repay a previous debt. Therefore, if he does not have the funds, it is forbidden to demand payment, even with the intention for him to borrow from others in order to repay his original loan.
However, nowadays it is a common practice in many countries, for people who need large sums, to borrow from other sources in order to repay their original loans. Therefore, if when the loan was originally asked for, the borrower had the intention to repay with funds borrowed from other sources, it is permitted to demand payment even when the only possibility to cancel the debt is through a new loan.
However, if the lender knows that the borrower does not have alternative sources of credit or assets which could be sold in order to cancel the debt, the Torah prohibition applies, and repayment cannot be demanded.
The borrower is permitted to collect funds (Tzedaka) from third parties who are willing to help the impoverished borrower repay his loan, as long as he makes it clear that the funds are going to be used for this purpose. Under certain circumstances, he may even apply his own Maaser to help cancel his obligation. (In these cases, one must seek competent Rabbinical advice)
We have so far dealt with matters regarding to the lender. We shall now refer to issues related to the borrower. In what cases one should not ask for a loan.
When not to borrow:
There is a rule (Sh.A.ibid) which forbids to borrow, and spend the money in such a way that will make repayment impossible. (If the funds are required for investment purposes, it is expected to inform the lender of the risks involved, so that in case, G-d forbid, the venture fails and the debt cannot be repaid, the prohibition (of not repaying the loan) will not apply, because the lender would have been informed of the risks involved (according to Ta"z ibid).
Tehilim 37 states that "A wicked person asks for a loan and does not repay". In other words, he who does not honour his debts is considered wicked. Halajic authorities maintain that this is the case even when the lender is wealthy. (Gra"z, Hiljot Halvaa5)
Opinions differ between Halajic authorities as to wether the prohibition of not paying applies when the lender has not asked for payment, because it may be considered that the lender has agreed to postpone maturity. (Sh.A.J.M. 73:6, and their comments, and Sha"J 232:2). Nevertheless, all agree that when payment is claimed, it must be effected immediately.
If parents have contracted a debt, and have then passed away, or if it seems that they may never be able to repay, it is appropriate for their sons to cancel their debt, as long as they have the means to do so. The reason for this is to avoid being considered in the category of "the heathen who asks for a loan and does not repay" (Tehilim 37:21), and in this way, complies with the mitzvah of Kibud Av vaEm (honouring one's parents). If the only way to repay the debt of parents is to use funds from Maaser, one is allowed to do so.
If numerous brothers are involved, the Mitzvah refers to all of them. It is therefore appropiate for the debt to be divided among them, even if the debt was originally destined for the benefit of only one of the brothers , for example, to pay for his education, or for health problems.
If someone borrows money, and when the debt matures the lender does not come forward to claim repayment, should the borrower approach the lender, or is he entitled to wait until asked for repayment?.
If the borrower is aware that the lender expects to recover his money, and does not intend to let him keep the money as a gift, nor to extend the term of the loan, the borrower is obliged by Halaja to come forward and voluntarily pay for the loan, even if payment has not been requested.
It is forbidden for the borrower to withhold money which belongs to others. Furthermore, if he is in possession of the funds, and delays payment by making the lender come and go, he is violating a commandment (written by the prophets and in Mishlei 3:28) .It is convenient to consult Ahavat Jesed, (volume 11,24) written by the Jafetz Jaim, which points out the gravity of withholding someonelses money, without the authority to do so. In that same section, he issues a warning to disseminate this scourge (especially nowadays!) . This is even more important when money is devalued, and delay causes a real loss. (Brit Iehuda 2:31)
If the borrower is not sure wether the lender will forgive the loan or not, he is not obliged to come forward and repay the loan, and he is therefore entitled to wait until he is asked to do so. However, even if he is not sure of the intentions of the lender, and supposes that he has forgotten the loan, he must at least remind him.
The lender is authorized to demand the payment of the loan, even if many years have gone by since maturity, and the opinion that if it has not been claimed denotes that it has been forgiven, is not valid. However, in order to avoid deception, the Daian (rabbinical judge) who is judging the case, must clarify why the lender did not demand payment earlier.
If the borrower suffers a setback and looses his wealth, and has no means left to cancel the loan, even if in this case, he is not obliged to seek employment to repay , but he is still considered an "evil person who borrows and does not pay back". All income which comes into his possession, even if they are goods, must be used to cancel his loan. Even if the borrower is a sage, he must sell his books in order to honour his loan. All the more reason for him to be obliged to sell his dwellings, unless exempted to do so by the lender. (Gra"z, Hiljot Halvaa 5-). However, with regards to his dwellings, opinions differ, and some consider thet the lender must have lived in the dwellings for at least 12 months, before he can expell the borrower. -Rabbi Akiva Eiguer J.M. 97:23)
If a lender declares, even if only to himself and nobody overheard him, that he forgives a loan, the loan is forgiven, and the borrower does not have to pay. However, if this declaration was merely a thought and never expressed verbally, it is worthless (according to most opinons).
If the lender states that he has lost all hope of collection, this is not considered as a pardon, and the borrower is still obliged to pay, according to the Halaja.
This is only true if the financial situation of the borrower has remained unchanged since the moment he has borrowed the money. However, if he has suffered unforeseeable financial losses which have caused the lender to abandon hope of collection, and this is explicitly stated by him, it is considered as if he has forgiven the loan, and the borrower is exempted from payment.
Debts from bankrupt companies (eg.limited companies) can only be collected from the funds available of the firm. If the firm has no means to pay the creditors, they can collect from company assets. However, according to Halaja, the directors of the defaulted company do not have personal responsibility for the companies debts, and are not obliged to pay from their own assets.
However, if clearly proven that they have been deliberately negligible, and have allowed the misuse of funds, they will have the moral obligation to repay from their personal assets.
The Mitzvah of lending to those in need is so valuable, that the prophets have assured that Hashem will answer the prayers of the people of Israel, by merit of this Mitzvah. (Ieshahaiahu 58:6-9;levamot 63)