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 you describe.
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 tactic.
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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