Justice Minister: New Bankruptcy Law ‘Among Most Important Ever Passed’

Israeli Bank Discount, Bank Hapoalim and Bank Leumi stand next to each other in central Tel Aviv. (Miriam Alster/ Flash90)

The Knesset late Monday passed on its second and third reading what many in the political establishment have called the current government’s most important economic reform – the Debt Repayment Law, which seeks to reduce penalties for debtors who are forced to declare bankruptcy, and to enable smaller holders of debt to get a bigger share of bankruptcy settlements on money they are owed.

This is the first comprehensive law on bankruptcy that any Israeli government has passed; until now, bankruptcy was governed by a pastiche of rules, many authored during the Mandatory period, and unsuitable for the modern era, according to Justice Minister Ayelet Shaked, the chief promoter of the reforms.

Among the main aspects of the law is a section limiting the time debt holders have to collect debts to four years. Until now, many Israelis who faced bankruptcy were stuck with debts that could continue for decades, with interest and penalties mounting to ensure that they remained in debt for the rest of their lives. The law is designed to encourage debt holders to make a deal with the people who owe them money, and then allow them to continue with their lives.

Another important tenet of the law is one that enables individuals who are debt holders to get priority when bankruptcy settlements are made, as opposed to the situation until now, in which banks received priority. Under the new law, local and national governments that are owed money – such as for taxes – by a bankrupt individual will agree to place themselves at “the back of the line” when the assets of the bankrupt party are distributed to pay off debts. As banks, which have the legal staff to pursue their own interests, are set to be the biggest beneficiaries of that aspect of the law – since the “pool” of assets to be collected will now be larger – they have agreed to leave over at least 25 percent of settlements for collection by non-bank entities, such as small businesses and individuals.

The law will apply to individual debt holders who owe at least NIS 50,000, and businesses that owe at least NIS 75,000. Only debt holders who owe those amounts will be able to enter into bankruptcy proceedings. Before passage of the law, a debt of NIS 25,000 was sufficient to enable an individual or business to declare bankruptcy.

The law was approved by a unanimous Knesset vote of 35 to nothing. Shaked said that the law “is one of the most important ever enacted for small debt holders, and for those forced to declare bankruptcy. The Knesset has done a great thing for the weaker elements of society.”