The Jewish Ethicist: Settling Up
Seeking credit card debt settlement.
Q. I fell behind in my credit card debt and accumulated a lot of fines. I want to pay what I can, but I can't afford the whole amount. Is it ethical to seek a settlement involving partial payment?
A. You're certainly not alone. Statistics show that Americans are
holding a record amount of credit card debt. Most people are able to bit
the bullet and pay off all their debt. But a significant and growing
minority find that due to excessive credit use, or to unexpected
employment or health setbacks (actually most cases involve a little of
each), they just can't afford to pay everything. A settlement is the
best they have to offer, short of bankruptcy.
Out of court settlements have an honored and even privileged status in
Jewish law. Judges are encouraged to offer the litigants a settlement at
the beginning of proceedings: "It is a mitzvah [fulfillment of a
commandment] to say to the litigants at the beginning of proceedings,
'Do you want a ruling or a settlement?'" (1)
What commandment is fulfilled? The admonishment of the prophet Zechariah
(8:16), who urges: "Truth and judgment of peace judge in your gates."
Seemingly there is a tension between truth, which will vindicate one
party and incriminate the other, and peace, which implies harmony among
the litigants. The Talmud tells us that "judgment of peace" is a
negotiated settlement. It is judgment because it is guided by legal
principles, but it is peaceful because it takes into account
considerations not strictly admissible in court, and is not forcefully
imposed on the parties.(2)
However, settlement is only favored when it is needed to take into
account the legitimate claims of each side. Sometimes the strict letter
of the law cannot fully take account of important equitable
considerations. Settlement is frowned upon as a way of dragging out
proceedings and pressuring the other side to waive legitimate rights.
The same chapter of the Code of Jewish Law (Shulchan Arukh) warns: "It is forbidden to seek excuses to avoid payment, in order that the other side should agree to a
compromise and forgo the rest." A compromise thus reached is not
considered to be a true waiver, and the person is still religiously
obligated to pay. (3)
So the question here is if you have any legitimate basis for reducing
your debt, or if you are merely using your power of refusal as a
delaying tactic to compel the credit company to moderate their terms.
While this obviously depends on your individual circumstances, I think
that in general if you are in difficult financial straits and not hiding
information from your creditors, you may do your best to persuade the
other side to accept a settlement. In general, this is not taking unfair
advantage of them.
The main consideration here is that you are not the only customer of the
lender, and their charges are designed to ensure their overall
profitability. This includes making a reasonable profit on the average
borrower who is paying a rate close to the market rate, making large
profits on people who unwittingly accumulate large charges in fines and
specially high interest, and occasionally having to give up on part of
the interest or even principal for borrowers with hardships, like those
A related consideration is that these lenders are not pussycats. They
are more like tigers. The Shulchan Arukh refers a common situation where
an ordinary individual or business is trying to recover a debt, and is
bullied by the delaying tactics of the debtor until they are really
coerced into a settlement. This is not the situation of the credit
companies, who are well able to display fortitude vis-a-vis the debtor
when this is required. Naturally, this doesn't give the ower carte
blanche to run up debts and fines and then ignore them. And if you hide
information you are obligated to provide then you are taking advantage
of a leniency which doesn't really apply to your situation. But if you
are open about your situation and you feel that it would be in the
interest of the lender to reach a settlement with you, pursuing this
avenue is a legitimate course of action.
Your letter states that for you, the alternative to settlement is
bankruptcy. I have expressed my opinion in the past that bankruptcy can
be a necessary and ethical course of action, again if the debtor is
acting openly and in good faith. It follows that the "threat" of
bankruptcy is a legitimate one, and is not just a bullying or delaying
The legitimacy of seeking a settlement extends to compromising on the
principal, not only on interest and penalties. Even so, I do think that
you should make every effort to pay back the principal. The question of
the legal and ethical applicability of the Biblical interest prohibition
in the modern economy is a complex one which is beyond the scope of my
column. But I think that a payment plan which involves eventual payment
of the entire principal is an ethical watershed which will give you a
genuine and well-deserved feeling of independence and fairness in the
unpleasant negotiations you are compelled to engage in now.
Stubbornly creating obstacles to fulfilling legal obligations, in order
to create pressure to settle, is an inappropriate tactic, and any
settlement agreed to in this way is not considered a truly voluntary
agreement. But genuine financial hardship, reached by an unfortunate
debtor who has acted in good faith, is not a delaying tactic. This is a
legitimate basis for seeking a compromise settlement with a credit
company, certainly for the interest and penalties and in case of need
for the principal as well.
SOURCES: (1) Shulchan Arukh Choshen Mishpat 12:2 (2) Babylonian Talmud
Sanhedrin 6b. (3) Shulchan Arukh Choshen Mishpat 12:6
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