In modern law, the proceeding taken by the courts of justice with regard to debtors unable to pay their debts in full, when all the creditors become parties to the proceeding. The object of bankruptcy laws is twofold: first, equality among creditors; second, the discharge of the debtor, so that his future earnings may be free from levy for his old debts. There is no trace in the rabbinical jurisprudence of anything like a discharge inBankruptcy; on the contrary, Hillel already found means to abrogate the effect of the Biblical year of release, the simplest of all laws for the discharge of poor debtors (see Prosbul). As to equality among creditors, the Talmud tends very much the other way; for every "sheṭar" or sealed bond (obligation attested by two witnesses) operated from its date as a mortgage on all of the debtor's land; only bonds of the same date stood on an equal footing; and in many places the custom was to mark the hour, and thus to give preference even between bonds of the same date. Among debts by simple contracts the one first ripening into judgment would take priority. In the later Middle Ages, when the Jews became landless and when their little wealth was invested in jewels, in merchandise and shipping, in silver and gold, or in loans to the Gentiles, the priority among bondholders was extended to such personal property as might be in hand at the time of the insolvency (as to nature and effect of bonds, see
Cases would, however, occur in which execution was levied on behalf of several creditors of the same rank and in which the law had to contrive some plan of distribution. Here the method of the Rabbis differs widely from that of modern courts. The division of the fund is not made in proportion to the demands, but according to the number of creditors; none of course to be paid more than the full amount of his claim. If there are five creditors, and the smallest claim is less than one-fifth of the fund, it is paid in full; the rest of the fund being divided, on the same principle, among the other four creditors. The example given in the Ḥoshen Mishpaṭ puts it thus: Suppose the fund be 300 dinars, and there are three creditors with claims for 300, 200, and 100 dinars respectively, each claimant receives one-third of the fund; i.e., 100 dinars. Again, suppose the fund be more than 500 and less than 600 dinars, each claimant receives an amount equal to the smallest claim, i.e., 100 dinars, and, of the remainder, each of the two remaining creditors receives an amount equal to the smallest claim, i.e., another 100 dinars; and the rest goes to the third claimant (Shulḥan 'Aruk, Ḥoshen Mishpaṭ, iv. 10).
Another case is mentioned: Where two Jews hold bonds against a Gentile whose property is proved insufficient to pay both in full, and the proceeds come to a Jewish tribunal for distribution, the interest ranks with the principal, and an objection from the holder of the junior bond, because the interest arose after the date of the elder bond, will not be considered (ib. 15).
These views are sustained by the corresponding passages in Maimonides, "Yad," Malveh xx., and in the Ṭur, Ḥoshen Mishpaṭ, civ., and "Bet Yosef," ad loc., and run back—that about the manner of distribution among creditors, to Ket. x. 4, 93a; and that about interest, to a principle set forth in Ket. xii. 1. R. Moses Isserles (to Ḥoshen Mishpaṭ, lxxxvi. 1), however, thinks that the junior creditor may redeem by paying interest up to the day.