Israel's Bankruptcy Law Eases Debt Relief but Tightens Credit Access, Study Finds

A new study by the Bank of Israel reveals that while Israel's 2019 Bankruptcy and Economic Rehabilitation Law has made it easier for individuals to access debt relief and achieve financial recovery, it has also led lenders to become more cautious in extending credit.

The research, conducted by Yonatan Barzani, Dr. Roei Stein from the Bank of Israel's Research Division, and Dr. György Walter from Eötvös Loránd University, analyzed data from 2001-2020 and examined bankruptcy law reforms in Europe and Israel. The findings indicate that when countries simplify the process for debtors to enter bankruptcy proceedings and have their debts discharged, the number of applications significantly increases, peaking within three to four years before gradually returning to previous levels within six to seven years.

In Israel, the 2019 law, which emphasized debtor rehabilitation and a "fresh start," saw an increase in bankruptcy applications until 2022-2023, after which they stabilized. However, the researchers 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 more persistent effect was observed among credit providers. The study suggests that when laws facilitate debt forgiveness, banks and other lenders factor in a higher likelihood of non-repayment, leading them to slow the expansion of consumer credit. This shift begins around the time of legislation, peaks within two years, and can last for at least five years.

Attorney Yosef Weitzman, with over two decades of experience in enforcement, collection, and insolvency, commented that the findings underscore the need for individual assessments before entering bankruptcy proceedings. 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 advocates for exploring alternatives like settlement agreements, debt restructuring, or payment plans, emphasizing the importance of considering the long-term implications of any chosen path.