Insolvency and Debt Arrangements - What Has Changed, What Is Protected, and Why It Is Important to Know This Before the Situation Worsens

1. The Insolvency and Economic Rehabilitation Law, 5778-2018, which came into effect in September 2019, replaced all existing bankruptcy mechanisms and changed the balance between creditors’ rights and the debtor’s right to a fresh start.
2. A creditor holding an unenforced judgment may initiate insolvency proceedings against a debtor, thereby freezing all other collection proceedings and bringing all creditors into a single framework.
3. A debtor who conceals assets, inheritance, income, or engages in asset-stripping activities risks not only discharge but the entire proceeding, and may even face criminal liability.
4. An economic rehabilitation plan typically lasts three years. A debtor who complies fully is granted discharge from the remaining debts.
5. The State has changed the status of tax debts: under the old law, debts to tax authorities enjoyed absolute priority. Under the new law, the rule has changed, and only certain deductions still enjoy priority.

What Has Changed and Why It Matters

For decades, bankruptcy proceedings in Israel were conducted based on outdated Mandatory legislation that did not suit modern economic realities. Practice developed through case law and custom, but the normative foundation was shaky. The Insolvency and Economic Rehabilitation Law, 5778-2018, changed all that.

The central conceptual shift is the emphasis on economic rehabilitation alongside debt repayment. The assumption is that a person who incurs debts in good faith and cannot repay them should not be enslaved to those debts forever, but is entitled to an opportunity for a fresh start, subject to committed participation and fulfillment of disclosure obligations.

Two Tests for Determining Insolvency

Not everyone who fails to pay a debt is insolvent. The law establishes two tests:

The cash flow test – whether the debtor is unable to pay debts when due, even if the debtor possesses illiquid assets. Someone who owns an apartment but has no current income to pay ongoing debts may meet this test.

The balance sheet test – whether the debtor’s total liabilities exceed total assets. The two tests need not be met simultaneously; meeting one may suffice for initiating proceedings.

Discharge – What It Grants and What It Does Not Grant

Discharge is the order that releases the debtor from remaining debts after complying with the rehabilitation plan’s conditions. This is the ultimate goal of the proceeding – debt cancellation and a clean slate.

However, discharge is not a universal blanket. Certain debts are non-dischargeable: child and spousal support obligations, criminal fines, and debts incurred through fraud. A debtor who files for insolvency primarily to escape a support obligation will typically find this avenue closed.

As It Turned Out: Three Anecdotes from Case Law

First case: A debtor who waived an inheritance to prevent creditors from reaching it. The trustee’s investigation revealed that he waived approximately 30,000 shekels he was entitled to receive from an estate. The judge determined this was a planned maneuver designed to prevent the creditor from collecting the debt, noting that he and his family members “apparently mobilized for advance planning of the will.” The proceeding was dismissed for lack of good faith.

Second case: A debtor who committed two defaults simultaneously – concealed an apartment inherited from his father, and additionally took a loan of 70,000 shekels during the proceeding without disclosing it. When he filed a second insolvency petition after the first was dismissed, he requested that the loan – the very loan taken in violation of the law – be included among the debts for which he would receive discharge. The judge determined that one who adds “sin upon transgression and brazenly seeks in bad faith to obtain discharge on that same loan” will not be granted it. The second proceeding was also dismissed, and filing a third was conditioned on a cooling-off period and payment of 4,000 shekels.

Third case, and surprising: A debtor who completed the rehabilitation plan, accelerated all payments, and received final discharge from her debts – and subsequently inherited a quarter share in an apartment valued at 2.4 million shekels. A creditor requested that the inheritance be included in the bankruptcy estate. The court granted the request, determining that since the original rehabilitation period had not yet ended in July 2025, the proceeds from the inheritance would be transferred to creditors – not to the debtor. The lesson: discharge is not an absolute barrier if the inheritance acquired legal effect before the end of the original rehabilitation period.

What Can a Creditor Do When a Debtor Fails to Pay

A creditor holding an unenforced judgment may, under certain conditions, initiate insolvency proceedings against the debtor. Issuance of the order to commence proceedings freezes all other collection proceedings, seizes all the debtor’s assets, and brings all creditors into a collective framework designed to distribute assets proportionally. This move can be a powerful tool – but may also lead to an outcome where the creditor receives less than expected if the debtor’s assets are insufficient.

The Right Moment to Act

The most common mistake – on both the debtors’ and creditors’ sides – is to wait. A debtor who senses that debts are accumulating beyond repayment capacity and waits for a miracle that will not come arrives at the proceeding with a worse situation and far more suspicions regarding actions taken in the interim. A creditor who waits many months before acting may find that assets once in the debtor’s possession are no longer there.

Early consultation – before the proceeding begins – is the investment that changes the outcome.

Are you in a situation of debts you are struggling to meet, or a creditor unable to collect? It is advisable to know what options are available to you before the situation worsens further.

© Tidhar Tzur Law Firm | This article is for general information purposes only and does not constitute individual legal advice.