Bankruptcy & Insolvency of Israeli Debtors: A Creditor's Guide

1. Overview

When a debtor — whether an individual or a company — is unable to pay their debts, the ordinary debt collection process gives way to the formal insolvency regime. Understanding how Israeli insolvency works is critical for foreign creditors: if you are owed money by an Israeli party who becomes insolvent, you need to take specific steps in the insolvency proceedings to protect your recovery.

Missing the proof-of-claim deadline or failing to engage with the insolvency proceedings can result in losing your right to participate in the distribution of assets entirely.

2. The Insolvency and Economic Rehabilitation Law 2018

Israel's insolvency framework underwent a comprehensive modernisation with the enactment of the Insolvency and Economic Rehabilitation Law 2018 (Chok HaHadlanut VeShikum Kalcali), which came into full force in 2019. This law replaced a patchwork of older statutes (including the Bankruptcy Ordinance 1936 for individuals and the Companies Ordinance winding-up provisions for companies) with a unified, modern framework.

Key innovations of the 2018 law include:

• A unified framework covering both individual and corporate insolvency
• A stronger emphasis on rehabilitation (reorganisation) alongside liquidation
• Improved protection for secured creditors
• Recognition of cross-border insolvency proceedings (based on the UNCITRAL Model Law)
• Greater court oversight and trustee accountability

3. Individual Insolvency (Personal Bankruptcy)

An individual who cannot pay their debts can apply for a debt settlement order (tzav lehesder choboth) or, where rehabilitation is not feasible, for a bankruptcy order (tzav pshitat regel). Creditors can also petition the court for a debtor's bankruptcy where the debtor owes more than NIS 50,000 and has defaulted on payment.

The process for individual insolvency:

1. The court appoints an official receiver (haכnasah letofen) who takes control of the debtor's assets
2. An automatic stay is imposed — all individual enforcement actions (Execution Office proceedings) are frozen
3. The official receiver investigates the debtor's assets and liabilities
4. Creditors are invited to file proofs of debt
5. A rehabilitation plan may be proposed, or the debtor's non-exempt assets are realised and distributed
6. If the process concludes successfully (and the debtor has cooperated), the debtor receives a discharge from their debts — a fresh start

The rehabilitation process typically takes 3–5 years, during which the debtor must live within a court-approved budget and contribute any surplus income to the creditors' pool.

4. Company Insolvency: Liquidation and Restructuring

For Israeli companies, the 2018 law provides two main paths:

Compulsory liquidation (pkiyah): A court-ordered winding up of the company, leading to the sale of all assets and distribution to creditors in order of priority, then dissolution. This is typically the path for companies with no viable business to rehabilitate.

Debt restructuring (hesder choboth): A court-supervised process in which the company proposes a restructuring plan to its creditors. If approved by the required majorities of creditors (and confirmed by the court), the plan binds all creditors — including those who voted against it. This allows viable businesses to continue operating while restructuring their debt burden.

In both cases, a trustee (ne'eman) or administrator (menahal meyuchad) is appointed to manage the proceedings under court supervision.

5. Filing a Proof of Debt

When insolvency proceedings are opened, creditors are notified (typically through publication) and invited to file a proof of debt (hatavat chov) with the trustee or the court. The proof of debt sets out:

• The amount of the debt
• The nature of the debt (contract, tort, judgment, etc.)
• Whether the debt is secured (with details of the security) or unsecured
• Supporting documentation (invoices, contracts, judgments)

Filing a proof of debt is critically important. Creditors who do not file within the deadline set by the trustee or court lose their right to participate in the distribution of assets, even if the debt is genuine and valid.

For foreign creditors who may not be in regular receipt of Israeli court publications, it is essential to monitor the insolvency proceedings — if you know or suspect your debtor is insolvent, engage an Israeli attorney immediately to protect your position.

6. Creditor Priority: Who Gets Paid First?

The 2018 law establishes a clear priority order for the distribution of assets in both individual and company insolvency:

1. Secured creditors: Creditors with valid security interests (mortgages, floating charges, pledges) over specific assets are paid first from the realisation of those assets, up to the value of the security.
2. Insolvency costs: The costs of the insolvency proceedings themselves (trustee's fees, legal costs, etc.) are paid next.
3. Preferred creditors: Certain debts are given priority over ordinary unsecured creditors — typically including employee wages and severance pay (up to statutory limits) and certain tax obligations.
4. Ordinary unsecured creditors: Most commercial debts (trade creditors, loan creditors, etc.) rank here — paid pro rata from whatever assets remain after the above have been satisfied.
5. Subordinated creditors: Some debts are specifically subordinated — paid only after ordinary creditors.
6. Shareholders: Only entitled to any surplus after all creditors are paid — in practice, rarely receive anything in liquidation.

In most insolvencies, ordinary unsecured creditors receive only a small fraction of their claim — sometimes nothing. Understanding where you rank in the priority order at the outset of a relationship (and considering taking security where possible) is an important credit risk management step.

7. The Automatic Stay

When an insolvency order is made, an automatic stay (atzira automatit) comes into effect immediately. This prevents:

• Any new or ongoing enforcement actions against the debtor's assets (Execution Office proceedings are frozen)
• Commencement of new legal proceedings against the debtor without court permission
• Foreclosure by secured creditors (subject to exceptions)

The stay gives the trustee time to take stock of all assets and liabilities before individual creditors can dismantle the estate piecemeal. If you have an active Execution Office file when an insolvency order is made, your enforcement stops — you must pivot to the insolvency proceedings instead.

8. Foreign Creditors in Israeli Insolvency

The 2018 law explicitly states that foreign creditors participate in Israeli insolvency proceedings on the same footing as Israeli creditors — there is no discrimination based on nationality or residence.

The law also incorporates provisions based on the UNCITRAL Model Law on Cross-Border Insolvency, which facilitates coordination between Israeli insolvency proceedings and parallel proceedings in other countries where the same debtor has assets or creditors.

For foreign creditors, practical steps when a debtor enters insolvency include:

• Engage an Israeli attorney immediately to monitor proceedings and file a proof of debt
• Check whether any security was taken at the outset of the relationship — secured creditors are significantly better positioned than unsecured
• Investigate whether there are related parties or entities (parent companies, guarantors) who remain solvent and can be pursued
• Assess whether the trustee has grounds to recover assets fraudulently transferred before the insolvency — the trustee can claw back transfers made in the "suspect period" before insolvency