Bank of Israel Study: Easing Bankruptcy Laws Has Temporary Effect

A new study by the Bank of Israel indicates that while making bankruptcy proceedings easier can initially increase the number of individuals seeking relief, this effect diminishes over time. The research, which analyzed data from 2001-2020 and reforms in Europe and Israel, found that easier access to debt discharge leads to a significant rise in applications, peaking three to four years later. However, within six to seven years, application numbers tend to return to pre-reform levels.

In Israel, the 2019 Bankruptcy and Economic Rehabilitation Law, aimed at providing debtors with a "fresh start," saw an increase in applications until 2022-2023, after which they reverted to previous levels. The study's authors noted that isolating the law's impact in Israel is challenging due to the onset of the COVID-19 pandemic shortly after its implementation.

A notable long-term effect observed by the researchers is on lenders. When laws facilitate debt forgiveness, banks and other creditors become more cautious, anticipating higher default rates. This leads them to slow the expansion of consumer credit, a trend that begins during legislative processes, peaks within two years, and persists for at least five years.

Attorney Yosef Weitzman, specializing in debt collection and bankruptcy for over two decades, emphasizes that entering bankruptcy proceedings should only follow a thorough individual assessment. He stated, "Bankruptcy is an important legal tool, and in the right case, it can allow a person unable to repay their debts to rehabilitate and get a fresh start. But the mere fact that discharge is possible does not mean it is the right path for every debtor." Weitzman advises exploring alternative solutions like debt arrangements or payment plans before resorting to full bankruptcy, stressing the need to examine all financial aspects, including income, assets, and potential disputes with creditors, to determine the most suitable long-term solution.