In 2015, the number of Israeli debtors who were insolvent was nearly 75,000, and the number of bankruptcy applications stood at 50,296; all together, 2.2% of the total population in Israel looked to the law to resolve their debt issues.

Recent efforts in the Israeli Knesset have set out to reform insolvency law.  In 2015, a new temporary provision, Amendment No 47, amended the 1967 Execution Law.

Under the 1967 law, a debtor has the option of being defined as a 'debtor limited by means' by claiming he is unable to pay his debts within a four-year timeframe, following an investigation by the Chief Enforcement Officer.  In such cases, under the previous version of the 1967 Execution Law, the debtor was required to pay a symbolic sum on a monthly basis until the debts had been paid off, taking into consideration his income and expenses. This procedure for debtors limited by means appeared to be unique to the Israeli legal system. Somewhat confusingly, Bankruptcy Law also offers a solution to insolvent debtors. Here, the District Court is empowered to force debtors to pay a monthly sum, also taking into consideration their income and other expenses. The main difference between the two laws is that the bankruptcy process offers a comprehensive payment solution, while the 1967 Execution Law in previous form indentured the debtor indefinitely.

Summing up: until September 2015, a debtor under the 1967 Execution Law maintained his insolvency, while under the Bankruptcy Law the debtor could resolve his debts by a defined process of discharge. By doing so, the bankrupted debtor was given an opportunity for a fresh start.

This 'debtor limited by means' process under the 1967 Execution Law was abolished under Amendment No 47, which now allows such debtors to obtain a complete discharge of their debts – something to which they would have been entitled had they applied for discharge under the bankruptcy regime.

As per the new temporary amendment, the Chief of Enforcement Officer can discharge a debtor for his debts up to the sum of 800,000 NIS. As of the end of 2016, 2,736 debtors had submitted requests for a discharge under the new temporary provision, of which 10% have already received a discharge order within that year.  Notably, this provides a substantial benefit to the debtor, as, under typical bankruptcy proceedings in Israel, a similar process can take an average of three to five years.

Once a permanent amendment for the proposed Law of Insolvency and Economic Recovery insolvency passes, the law will likely sunset the entire ‘debtor of limited means’ process. This raises a concern regarding debtors who are not suitable for the bankruptcy procedure or other discharge solutions.

This concern is non-trivial: The number of insolvency proceedings in Israel has grown exponentially; more than 50% of the proceedings in the District Court are insolvency proceedings. Cancellation of the institution of 'debtor limited by means' will place a heavy burden on the court system in bankruptcy proceedings.

The proposed permanent amendment to the insolvency law will also initiate a number of other onerous changes:

  • It will transfer the authority to manage insolvency proceedings from the District Court to the Magistrate's Court;
  • It will empower a Chief Enforcement Officer to conduct proceedings for debtors with low debts (up to NIS 150,000);
  • It will set a defined payment period for the debtors to discharge their debts;
  • A debtor who is not entitled to be discharged will not remain in the bankruptcy proceedings.

With all of these changes, the reforms will likely harm the indigent, ie, the people who are most in need of protection and assistance. In view of the above, and in order to give debtors a real opportunity to deal with debts rather than sink into distress and poverty, I propose postponing the cancellation of the ‘debtor of limited means’ institution at least for an additional period of two years, in order to examine the effects of the changes made to the Bankruptcy Law.

In a recent Working Paper, I examined 300 cases under the temporary provision. In particular, I examined the discretion in granting discharge and mapped the types of debtors who applied for this proceeding instead of bankruptcy in the District Court. The study’s main findings are as follows:

  1. The process of discharge in the amended 1967 Execution Law is shorter and much more efficient than in court bankruptcy proceedings, and usually ends within six months, compared to three to five years in court.
  2. The average amount to be discharged was 280,000 NIS, which is more than the ceiling proposed in the new Insolvency Law.
  3. Only in 14% of the applications did creditors file objections. This number is significantly lower than the objections in the District Court applications process.

Neta Nadiv is Lecturer and Academic Director, Legal Clinics at Radzyner Law School.