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Introduction: Dealing with debt is not the end of the road
Dealing with heavy debts is one of the most stressful and upsetting experiences a person can go through. The feeling of helplessness, the constant calls from creditors, and the fear of the future can be paralyzing. However, it is important to know that the law in Israel offers a solution that aims not to punish the debtor, but to allow him to turn a new page. The Insolvency and Financial Rehabilitation Law, which came into effect in 2019, changed the approach towards debtors and places financial rehabilitation at the center.
This guide is designed to provide you with clear and accessible information about insolvency law in Israel . We will explain what the procedure is, what its key stages are, and how proper legal guidance can help you navigate it with confidence and return to a normal life path.
What is the Insolvency and Financial Rehabilitation Law?
Until 2019, the recognized procedure for dealing with an individual’s debts was “bankruptcy.” This procedure was often perceived as a mark of disgrace, and focused primarily on collecting debts for creditors. The significant reform brought about by the Insolvency and Economic Rehabilitation Law, 2018, changed this perception from end to end.
The main goal of the new law is to see insolvency as an opportunity for rehabilitation. The law seeks to balance two key interests:
- The economic rehabilitation of the debtor: allowing a person who has fallen into debt in good faith to receive a “discharge” (exemption from his debts) and return to being a productive citizen who contributes to society and the economy.
- Maximum debt repayment to creditors: Ensure that creditors receive the maximum proportional share of the debt they are owed, in an efficient and transparent manner.
The law applies to individuals, corporations, and non-profit organizations, and unifies all laws related to insolvency under one roof.
The main steps in the individual insolvency process
The insolvency process for an individual (referred to in the law as an “individual”) consists of a number of clear steps. It is important to understand that the process is managed by different parties depending on the amount of debt:
- Debts up to 166,627 NIS (as of 2024): The procedure is conducted with the registrar of execution.
- Debts over 166,627 NIS: The procedure is conducted with the Commissioner for Insolvency and Financial Rehabilitation Procedures.
Despite the difference in administrative authority, the principles of the procedure are similar and include the following steps:
Step 1: Submitting a request for an order to initiate proceedings
The procedure begins with the submission of a formal application. The application can be submitted by the debtor himself, a creditor, or the Attorney General. The application includes detailed information about the debtor’s financial situation, a list of his assets, debts, and the reasons that led to his situation.
Step 2: Issuance of an order to initiate proceedings and appointment of a trustee
After examining the application, the authorized entity (the registrar of execution or the supervisor) issues an “order to commence proceedings.” This order has immediate and significant effects:
- Stay of proceedings: All collection and enforcement proceedings against the debtor are frozen.
- Appointment of a trustee: A trustee is appointed whose job is to examine the debtor’s financial situation, investigate the circumstances of the debts, and manage his assets.
- Imposition of restrictions: Various restrictions are imposed on the debtor, such as delaying departure from the country and a ban on the use of credit cards.
- Determining a monthly payment: The debtor is required to pay a monthly payment to the foreclosure fund, according to his financial ability.
**Watch: Attorney Salior Ben Hamo explains the insolvency and financial rehabilitation process**
Stage 3: The interim period – examining the debtor’s situation
This is a period of approximately 12 months, during which the trustee conducts a comprehensive review. He examines the debtor’s financial conduct, assets, income, and the reasons that led to the debts. The debtor is obligated to cooperate fully with the trustee and submit monthly reports to him.
Step 4: Formulating a plan for economic rehabilitation and granting a discharge
At the end of the interim period, the trustee submits to the court a recommendation for a “financial rehabilitation plan.” The plan details how the bankruptcy funds will be distributed among the creditors and what the monthly payment amount will be that the debtor will be required to make. Typically, the payment period lasts about three years.
At the end of the payment period, and provided that the debtor has met all the terms of the plan and acted in good faith, he will be issued a discharge order . This order relieves him of the balance of his debts that arose before the order to open proceedings was issued, and allows him to turn a new and clean financial page.
Infographic: The road to economic recovery in five steps
(Title: Insolvency Procedure Track)
- Step 1: Submit the application
The debtor submits a detailed request to initiate proceedings, which reveals his financial situation.
- Step 2: Obtaining an order to initiate proceedings
Collection proceedings are frozen, and a trustee is appointed to examine the case.
- Phase 3: Testing period (approximately 12 months)
The trustee investigates the circumstances of the debt, and the debtor makes a monthly payment.
- Step 4: Formulating an economic rehabilitation plan
A payment plan is determined (usually for 3 years) that is tailored to the debtor’s abilities.
- Step 5: Receiving the discharge and turning a new leaf
Upon completion of compliance with the program, the debtor receives an exemption from the balance of his debts.
Common mistakes to avoid in the process
The insolvency process requires transparency and full cooperation. Avoiding common mistakes will significantly increase the chances of the process being successful and of obtaining a discharge.
- Hiding information or assets: Attempting to hide assets, income, or information from the trustee or the court is considered bad faith and may lead to the dismissal of the proceeding.
- Failure to cooperate with the trustee: Reports must be filed on time, questions answered, and meetings attended as required. Proper conduct with the trustee is critical.
- Creating new debts: During the process, it is forbidden to accumulate new debts. This indicates a lack of understanding of the need for financial rehabilitation.
- Creditor preference: It is prohibited to pay debts to one creditor at the expense of others after the procedure has been opened. All payments must be made through the bankruptcy fund only.
The importance of professional legal assistance
Insolvency law in Israel is a complex area, involving dealing with several parties – the supervisor, the trustee, the courts, and the creditors. Attempting to go through the process alone may lead to costly mistakes and jeopardize the possibility of receiving a discharge.
A lawyer specializing in the field will help you:
- Submit a complete and accurate application: ensuring that all required documents are submitted correctly.
- Represent you before the trustee and the court: ensure that your rights are preserved throughout.
- Formulate a realistic financial rehabilitation plan: work to ensure that the payment plan is tailored to your abilities.
- Provide peace of mind: Knowing that there is a professional accompanying you and guiding you at every stage significantly reduces stress and allows you to focus on rehabilitation.
Receiving professional legal advice from a lawyer is not a luxury, but an essential step to ensuring the success of the procedure.
Summary: There is a way out of debt
If you are struggling with debts that you cannot repay, it is important to know that you are not alone and that there is a solution. The Insolvency and Financial Rehabilitation Law is designed to help people in your situation turn over a new leaf. While the process requires commitment and cooperation, the end result is the possibility of receiving full discharge from debt and building a stable financial future.
The first and most important step is to seek legal advice to understand your options. If you need guidance, please contact our office to schedule a confidential consultation.
Note: This article provides general information only and is not a substitute for individual legal advice. All legal advice should be tailored to the specific circumstances of the case.