Short and Long-Term Benefits and Consequences of Israeli Bankruptcy Proceedings

Insolvency, also known to many as bankruptcy, is a legal and economic state where an individual or company cannot meet their financial obligations to creditors. Simply put - when debts exceed the ability to pay them, we enter a state of insolvency.

At the law firm of Frankel Emslam & Partners, led by Attorney Manor Frankel who specializes in Israeli insolvency law, we meet people daily who have found themselves in genuine financial distress. It's important to understand that this situation can happen to any of us - whether due to unemployment, illness, business failure, or simply financial management that deteriorated over time.

In this article, we will review the benefits and consequences of Israeli bankruptcy proceedings, focusing on short and long-term aspects, and examine how to deal with the challenges along the way.

What is Israeli Insolvency in 2025?

In 2019, a significant change occurred in Israel with the enactment of the Insolvency and Economic Rehabilitation Law, which replaced the old Bankruptcy Ordinance. The new law represents a fundamental conceptual shift - moving from a punitive approach to a rehabilitative one.

While previously Israeli bankruptcy proceedings focused on attempting to maximize debt repayment to creditors, modern Israeli insolvency proceedings place much greater emphasis on the debtor's economic rehabilitation. The process aims to give the debtor an opportunity to break free from the cycle of debt and start fresh, while paying what they can afford.

Under Israeli bankruptcy law, the new reform brought several important changes:

Shortened procedure duration - While previously Israeli bankruptcy procedures could last ten years or more, today Israeli insolvency proceedings are generally limited to approximately 4 years.

Different tracks based on debt amount - Currently, Israeli law distinguishes between debts in low amounts (up to approximately ₪166,627 as of 2024) handled by the Israeli Execution Office, versus higher debts handled by Israeli courts.

Attorney Manor Frankel, the partner leading the insolvency practice at our firm, notes: "The new Israeli law brought fresh air to debtor treatment. We now see people receiving a real opportunity for rehabilitation, instead of remaining in a state of endless debt under Israel's debt collection system."

Immediate Short-Term Consequences

Entering Israeli insolvency proceedings brings a series of immediate consequences that are important to understand in advance. Our firm emphasizes to clients the importance of fully understanding these consequences under Israeli bankruptcy law to prepare properly:

Restrictions on Freedom of Movement and Economic Activity

With the commencement of proceedings under Israeli bankruptcy law, the debtor is prohibited from leaving the country's borders without special court approval from Israeli courts. This restriction is designed to prevent flight from the proceedings and associated obligations. Simultaneously, there are significant restrictions on bank account management - the debtor is declared a "special restricted customer" under Israeli banking regulations, cannot issue checks, and is limited in credit card use.

Important to know: During Israeli insolvency proceedings, the debtor may hold and manage a current account with a positive balance only, without credit facilities and without checkbooks. Use of immediate debit cards is permitted as long as there is a positive account balance.

Business Activity Limitations

Under Israeli bankruptcy law, the debtor is prevented from establishing or participating in founding a new corporation without approval, and cannot serve as a company director. There are also certain professions where practice is prohibited during Israeli proceedings, such as law practice, real estate brokerage, and others.

This is a critical point for those running independent businesses, as the restrictions may directly affect the ability to continue routine business activities under Israel's debt collection system. Sometimes it's necessary to transfer business management to another party or significantly reduce activity.

Reporting and Payment Obligations

Conversely, one of the significant advantages of Israeli insolvency proceedings is the stay of enforcement - from the moment an Israeli court issues an order to commence insolvency proceedings, all collection actions against the debtor are frozen. This means existing attachments are canceled and creditors cannot continue actions against the debtor through the Israeli Execution Office.

In exchange for this protection under Israeli bankruptcy law, the debtor is obligated to meet monthly payments determined for them (payment order) and submit periodic reports detailing their income and expenses. Full cooperation with the trustee and Israeli authorities is an essential condition for successful proceedings.

Unlike other countries, Israeli bankruptcy law requires strict adherence to these reporting requirements. We at Frankel Emslam & Partners accompany our clients through all these aspects and help them cope with the complexity of Israeli insolvency proceedings in the short term. For initial consultation, you can contact our office here.

Long-Term Consequences After Receiving Discharge

Israeli insolvency proceedings lead, in many cases, to receiving a "discharge" - an order releasing the debtor from remaining debts (except certain debts). The consequences of proceedings under Israeli bankruptcy law don't end with receiving the discharge, and there are long-term effects important to be aware of:

Financial Status and Credit Rating Rehabilitation

With discharge under Israeli bankruptcy law, most restrictions imposed on the debtor during proceedings are canceled. However, registration of having been in Israeli insolvency proceedings is maintained in credit databases for approximately three years after discharge.

During this period, Israeli debtors should note they may have difficulty obtaining new credit, opening a business, or getting a mortgage. Many financial institutions will require a "proof" period of responsible financial conduct before granting significant credit under Israel's debt collection system.

As Attorney Manor Frankel notes, "The real challenge actually begins after receiving discharge under Israeli bankruptcy law. This is the time to rebuild the financial system's trust."

Ongoing Professional Limitations

Despite most restrictions being canceled with discharge, there are professional limitations that may continue under Israeli law. For example, local authority laws stipulate that a person who was in Israeli insolvency proceedings cannot serve as a council member for two years after the end of proceedings.

In some professions, licenses suspended during Israeli proceedings need to be renewed, a process that may be complex and require legal assistance.

Non-Dischargeable Debts

It's important to know that not all debts are discharged in Israeli insolvency proceedings. There are debts that are non-dischargeable such as alimony debts, fines, and debts created through fraud. These debts will continue to apply to the debtor even after receiving discharge under Israeli bankruptcy law.

This is a matter requiring professional attention tailored to each case, and at our firm we provide individual consultation on this issue, with in-depth analysis of debt types and options available to the debtor under Israel's debt collection system.

Is Israeli Insolvency the Right Solution for You?

Before entering Israeli bankruptcy proceedings, it's important to examine whether this is indeed the most suitable solution for your situation. There are alternatives worth considering:

Debt Arrangement as an Alternative

Debt arrangement is an alternative worth examining before turning to full Israeli insolvency proceedings. Debt arrangement allows debtors to reach agreements with creditors through negotiation, which may lead to payment spread or even debt reduction outside of formal Israeli bankruptcy law.

The great advantage of debt arrangement is that it avoids the rigid restrictions of Israeli insolvency proceedings and can be shorter and simpler. We at Frankel Emslam assist greatly in formulating debt arrangements and conducting negotiations with creditors, and often succeed in achieving good results that eliminate the need for more formal proceedings under Israeli bankruptcy law.

Factors to Consider Before Entering Proceedings

Before deciding to turn to Israeli insolvency proceedings, it's important to consider several factors:

• Scope and source of debts - Are these debts manageable through arrangement outside Israeli bankruptcy law?

• Ability to repay part of the debt - Do you have regular income that would allow adherence to a payment plan?

• Professional effects - Will Israeli proceedings affect your ability to practice your profession?

• Effects on existing business - If you manage a business, will Israeli bankruptcy law allow its continued existence?

  
  

Attorney Manor Frankel emphasizes: "In any case, it's important to receive professional legal consultation before entering proceedings under Israeli bankruptcy law. We've seen many cases where proper advice at an early stage saved clients lengthy and complex procedures."

To contact us and schedule a consultation meeting with our office, please leave details here.

Israeli Insolvency Proceedings - Step by Step

Those who decided to turn to Israeli bankruptcy proceedings need to know the main stages in the process:

Application Submission and Order to Commence Proceedings

The first step is submitting an application for an order to commence proceedings under Israeli bankruptcy law. The application includes full details of the debtor's financial situation, assets, and obligations. Preparing and submitting the application takes several weeks to months, depending on case complexity.

If the Israeli court or Execution Office registrar (depending on debt amount) is convinced that the debtor is indeed in insolvency, they issue an order to commence proceedings. This order grants the debtor protection from creditor collection actions and allows them to "breathe" under Israeli bankruptcy law.

Trustee Appointment and Rehabilitation Plan Formulation

After issuing the order under Israeli bankruptcy law, a trustee is appointed to supervise the proceedings. The trustee examines the debtor's financial situation and formulates an economic rehabilitation plan. The plan determines how much the debtor must pay monthly to creditors, according to their ability.

Preparing and approving the plan can take several months under Israeli insolvency proceedings. During this period, the debtor already enjoys the protections of the proceedings but is required to cooperate fully with the trustee.

Rehabilitation Plan Implementation and Discharge Receipt

The rehabilitation period under Israeli bankruptcy law typically lasts between 3-4 years. During this time, the debtor is required to meet determined payments and report routinely on their financial situation.

If the debtor succeeds in meeting the rehabilitation plan conditions throughout the determined period under Israeli bankruptcy law, they are entitled to receive discharge (cancellation) of remaining debts. This is the stage that concludes Israeli insolvency proceedings and allows the debtor a fresh start.

Our firm accompanies clients throughout all these stages, providing professional response and support for all challenges that arise along the way. For comprehensive consultation on this matter, you can contact us.

Summary: Israeli Insolvency - The Key to a Fresh Start

Israeli insolvency proceedings are indeed complex and fraught with challenges, but they constitute a significant solution for those who find themselves in genuine financial distress. Israeli bankruptcy law emphasizes debtor rehabilitation and providing a real opportunity to start fresh.

With proper legal guidance, it's possible to minimize negative consequences and maximize benefit to the debtor under Israel's debt collection system. The law firm of Frankel Emslam & Partners is at your service with rich experience in the field, led by Attorney Manor Frankel, to lead you safely through this complex journey under Israeli bankruptcy law, until discharge and the fresh start you long for.

The information appearing in this article does not constitute individual legal advice, and each case must be examined on its merits by a professional. For personal consultation, please contact our office.