Shemitat Kesafim: The Year of Escape from Debt
Reflections on a Jewish Vision of a Model Israeli Society
Dr. Benny Porat discusses the precept of debt cancellation during the sabbatical year (Shemita) and proposes ways in which to update this practice to suit the economics of contemporary Israel and create a model society.
Photo courtesy of shutterstock
Published in: Makor Rishon
A new Jewish year has arrived, bringing with it the Shmita (Sabbatical) year. Many people wish to make the precepts related to the sabbatical year more than a halakhic problem that must be resolved; rather, they wish to transform these precepts into a source of inspiration for developing an exemplary Israeli society that fulfills a Jewish vision of social justice.
Of the two components of the sabbatical year—the suspension of agricultural labor and the cancellation of debts—I would like to focus on the latter and explore its potential to inspire a modern Jewish vision of an appropriate way to cope with the socially problematic aspects of a world based on credit.
According to the precept of cancellation of debts ("Shemitat Ksafim"), once every seven years, at the end of the sabbatical year, a declaration is made that cancels all outstanding loans and allows borrowers to start a new page in their financial lives. The Biblical assumption, which reflected the economic conditions of that period, is that most borrowers are poor, whereas creditors have ample means; accordingly, a loan is an antisocial and exploitative device that transfers a poor person’s limited capital to a person who is wealthy. The cancellation of debts is thus part of an entire system of precepts designed to deal with the social and economic problem that loans create: the Torah commands the rich to extend loans to the poor. The loan must be interest-free; that is, they must have a strong social component. There are then restrictions on the ways that the loan can be collected and collateral taken. In this context, it was also stipulated that all debts must be written off once every seven years. The cancellation of the debt gives borrowers an opportunity to escape the vicious cycle of taking out new loans to pay off old ones; once their debts are cancelled, they can work for their own benefit, rather than for the benefit of their creditors.
Although the precept of cancellation of debts may be an ideal way to resolve the problem of the relations between borrowers and lenders, in the real world the implementation of this mechanism is liable to create a two-pronged problem. Today, one problem, which the Torah itself already noted, might be called “over-protection.” That is, the protection that borrowers receive through the cancellation of debts may be so strong, and so injurious to lenders, that, paradoxically, it may rebound against the borrowers rather than serve them. As a result, this precept may lead people to be afraid to lend money, and if the poor cannot receive loans, they will be much worse off than they would have been without the precept of debt cancellation.
The second problem (which to a certain degree is related to the first and contributes to it) is that the cancellation of debts could be exploited by borrowers. Potential borrowers who know that all debts will be cancelled in a few years are liable to take out many loans, in the expectation that they will not have to repay them in the end. Indeed, when Hillel the Elder (first century BCE) saw "that the people refrained from giving loans one to another,” he instituted the prozbul (Mishnah Shevi’it 10:3). The main thrust of this enactment (without going into its halakhic minutiae) is that it permits creditors to collect debts owed to them even after the sabbatical year. This innovation almost completely negated the precept of cancellation of debts.
Once the prozbul was instituted, the cancellation of debts was no longer one of the ways in which Jewish law and the Jewish community dealt with the responsibility for poor members of the community. Support for the weaker sectors of society was relegated mainly (but not entirely) to the domain of charity. In the Middle Ages, the laws of charity were sufficient for dealing with the social and economic problems of the Jewish community, where members focused on the challenge of daily survival. But it is doubtful whether the laws of charity, however inspirational, are adequate to guide the modern Jewish state, which seeks to fulfill a revolutionary vision of an ideal society. Accordingly, it makes sense to go back to Biblical precepts such as the cancellation of debts in the sabbatical year, and to draw on them to create modern Jewish arrangements that will be a beacon for an exemplary Israeli society.
In this spirit, two members of Knesset, Isaac Herzog and Ruth Calderon, recently devised a plan to cancel the debts of citizens in financial distress during the Shmita year. According to their initiative, “nonprofit organizations working in the third sector will identify…families that have run into serious debt and will assist them during the sabbatical year until they reach an arrangement to settle their debts at the end of the process.… A fund will be established to raise money from the public at large, from individuals and NGOs, and from Jewish communities abroad. The families will agree to submit to close monitoring by the social-welfare organizations throughout an entire year, at the end of which…the families will enter into a debt repayment arrangement in which the banks and the electric company, for example, will write off a third of the debt, the debtor will return a third of the debt without interest or linkage differentials, and the last third will be covered by grant money from a foundation” (Globes, January 6, 2014).
Although this is a captivating idea with praiseworthy motives, if we examine the MKs’ initiative with the necessary seriousness (and assume that it is not a one-time media stunt by politicians), it appears that the proposal suffers from the two fundamental problems described above. It tries to renew the precept of debt cancellation in precisely the way that led Hillel the Elder to effectively annul it. First, it places a heavy burden on creditors, a burden that is likely to be too heavy. Even if commercial bodies could be found that would agree to cancel a third of the debt (and to forego the interest and linkage on another third), such an arrangement is apt to make them wary about extending credit to families with limited means or to allow them to pay in installments in the future, because they know that part of the debt will be cancelled in the next sabbatical year. In the end, such an arrangement is liable to work against families in distress just as Hillel saw that “the people refrained from giving loans one to another” long ago.
Calderon and Herzog were sensitive to this problem and slightly blunted its sting. In their model, only one-third of the debt that would be cancelled would be at the expense of the creditors (in addition to their loss of the interest and linkage on the third that the borrowers themselves would still have to repay), while another third would be covered by various public funds. In this way, the burden of the cancellation of debts will not fall entirely on the lenders, but will be distributed among the broader public. While this idea mitigates the first problem somewhat, it does not address the second problem: the MKs’ initiative still incentivizes disadvantaged people to exploit the arrangement inappropriately. It offers families that have fallen into deep debt a prize that might indicate to other families that it is possible and even worth their while to amass debt and consume more than they can pay for, knowing that in another seven years, the public will cover a third of what they owe, their creditors will forego another third, and the interest and linkage on the remaining third that they themselves have to pay will also disappear. While it is certainly inadvertent, the initiative of the MKs is liable to encourage families to take out loans and go into debt, on the assumption that in the future they will only have to repay a third of what they owe.
It seems, therefore, that although this initiative is a welcome step in the right direction, further thought and refinement is necessary in order to develop appropriate ways for renewing the social and economic precepts of the Bible in the economic environment of contemporary Israel. Because the matter at hand is not a matter of halakhic decision making—which is bound by strict principles and is the domain of recognized halakhic authorities—but rather is part of a search for inspiration for an original Israeli-Jewish creation, we may give free rein to our ideas and move in new directions.
Unlike the initiative proposed by the two members of Knesset, renewing the precept of debt cancellation in modern times should be implemented in a way that will not place too heavy a burden on the creditors and deter them from extending credit to those in need. Similarly, it must not give too much benefit to debtors, which might encourage them and other potential borrowers to take out loans and go into debt, confident that their debts will be cancelled in the future.
Here it is worth distinguishing between two groups that deserve assistance, guidance, and support during the sabbatical year: needy families that are deep in debt, on the one hand, and small businesses in need of economic oxygen in order to grow, on the other. With regard to these two groups, I would like to propose a multifaceted and moderate framework for a modern version of the precept of debt cancellation, which is not based on actually cancelling the debt—in full or in part—but on providing balanced alternatives.
With regard to families that are up to their necks in debt, I propose that once every seven years, at the time of the sabbatical year, these families be offered one of two options (or some combination of the two): 1) a one-year moratorium on repayment (a grace period), in a way that turns the sabbatical year into a year in which they are freed from repaying the debt and can invest their capital and energy in breaking out of the cycle of debt; 2) a rescheduling of the debt on a new schedule of repayment that will make it easier for them to repay their debt by allowing them to combine repayment with developing their businesses and becoming financially independent.
Both of the proposed options would give debtors a real opportunity to achieve financial independence, but at the same time, the debtors would be obligated to pay their creditors the full amount owed. Thus, these options would not incentivize potential borrowers to take out loans they don’t need, because they emphasize that loans must be returned and debts must be repaid. At the same time, the encouragement to repay debts in full will serve as an incentive for people of means to continue lending money to people in need, because the potential lenders will know that the debt will be repaid in full. And because there are costs associated with the grace period or with rescheduling the payments, and in order to keep those costs from becoming the responsibility of the lenders, it is preferable to have the public shoulder those costs (damage distribution), which will compensate the lenders appropriately.
Whichever option is used, it is extremely important to combine the opportunity given to debtors with professional guidance by NGOs from the third sector, which will help the debtors find ways to achieve financial independence and balance, as MKs Calderon and Herzog proposed.
With regard to small businesses struggling to take off, another track is possible. Aside from the proposed moratorium and rescheduling options, in special cases it should be possible to cancel a debt entirely by redefining a loan as an investment; in other words, the bank that issued the loan will be transformed from a creditor to a business partner (with its share of the business proportional to the size of the debt). Naturally, we cannot expect the bank to have expertise in running small businesses in a variety of areas; rather, we can set up special authorities for this purpose—whether private or governmental (such as MATI, the Jerusalem Business Development Center)—which will serve as the representatives of the bank in the company’s process of recovery and growth. Thus, in the end, everyone—including the creditors and their representatives—will enjoy the fruits of the growth of the businesses.
Transforming a debt into an investment has a number of advantages. The debt will be cancelled and the business will receive the financial oxygen it needs to thrive and develop. The creditor will not lose the amount of the loan, but will receive equivalent compensation from the business. As partners in the business, the bank and its agent will share in the large returns that the business can produce but also in the losses that may be incurred, and will consequently change from passive creditors to active partners in helping the business grow. Essentially, this process is in consonance with the Talmudic dictum: “He who lends money is greater than he who performs charity; and he who forms a partnership is greater than all” (B Shabbat 63a).
The precept of debt cancellation is implemented, as noted, once every seven years, during the sabbatical year. On the one hand, this cyclical recurrence helps firmly establish the social revolution of debt cancellation as a special, festive, and national event, in which all can take part in alleviating the economic distress of the disadvantaged. On the other hand, this cycle ensures that the significant opportunity offered by the precept of debt cancellation is a rare and valuable commodity that its recipients must use properly, because they will only have an additional opportunity in another seven years. These two aspects—society’s responsibility for those of limited means and the personal responsibility of people with limited means toward themselves—are the essence of the precept of debt cancellation during the sabbatical year.
This article was originally published in Hebrew in Makor Rishon in November 2014.