The Torah commands in Parashat Re’eh (Debarim 15:3) that at the conclusion of the Shemita year, “Va’asher Yiheyeh Lecha Et Ahicha Tashmet Yadecha” – one must cancel debts owed by Jewish borrowers. In the previous verse, the Torah introduced a prohibition against claiming debts after Shemita, and now the Torah adds an affirmative command to cancel outstanding debts.
The Sefer Ha’hinuch writes that the Torah commands cancelling debts after Shemita in order for us to develop proper Middot (character traits), and to strengthen our faith in Hashem. Cancelling debts every seven years engenders within us a generous character, training us to be willing to forego on money which is rightfully owed to us. When we act generously, the Sefer Ha’hinuch explains, G-d treats us with kindness and generosity, and the Torah therefore gives us commands which help us develop a generous character, so that we become worthy of G-d’s blessings. Moreover, the Sefer Ha’hinuch adds, this Misva helps us avoid the destructive quality of “Hemda” – lust for money and material assets. When a person foregoes on money which is rightfully owed to him, money which he had lent to somebody and now does not demand be returned, he will certainly refrain from trying to obtain money which does not belong to him and to which he is not entitled. Thus, by requiring us to forego on money which we have a right to claim, the Torah protects us from an unhealthy lust for money.
A debt is cancelled after the Shemita year even if a contract was written, such that the lender has right to seize the borrower’s property if he does not pay on time. The exception to this rule is where a specific piece of property was designated for the lender to seize if the loan is not repaid. In this case, since a piece of property has been designated, the loan is considered in a sense to have already been repaid, and thus the lender can claim the debt after Shemita. Similarly, if the borrower gave the lender a collateral, the debt is not cancelled.
If one had purchased goods at a store on credit, this debt is not cancelled after Shemita, because the law of Shemitat Kesafim (the remission of debts) applies only to loans. Likewise, money owed to employees may be claimed even after Shemita. If a couple divorced and the woman did not receive her Ketuba payment by the end of the Shemita year, the husband must pay, as this debt is not cancelled.
The Torah forbids an individual from claiming debts after Shemita, but a Bet Din is permitted to collect a person’s debts on his behalf if he had authorized them to do so. Therefore, one can circumvent the law of Shemitat Kesafim by assigning Bet Din as one’s agent to collect his debts, in which case they can collect even after Shemita.
If a person lends money to a borrower with the explicit stipulation that the debt would not be cancelled by the Shemita year, then the condition is binding, and the debt is not cancelled. Normally, Halacha does not allow making a condition that runs in opposition to Torah law, and such a condition is null and void. In regard to financial matters, however, such conditions are valid and binding, and therefore one can stipulate when lending money that the debt should not be cancelled by the Shemita year, and he may then collect the debt after Shemita.
This command applies in all places. The Torah obligation of Shemitat Kesafim applies only in times when the laws of Yobel are binding; nowadays, the obligation of Shemitat Kesafim applies Mi’de’rabbanan (by force of Rabbinic enactment). The Sages enacted that debts should be cancelled even nowadays so that this obligation would not be forgotten. The Sefer Ha’hinuch, in discussing this enactment, addresses the question of how the Sages could annul the borrower’s obligation to the lender. If, according to Torah law, the borrower owes the lender money, and the lender thus has a lien on the borrower’s property, how can the Sages come along and break this obligation? The Sefer Ha’hinuch answers by noting the famous rule of “Hefker Bet Din Hefker,” which empowers the Sages to seize private property when they see fit. Similar to the concept of eminent domain, whereby the government has the authority to seize property, the Sages are authorized by the Torah to enact laws even if they entail taking away people’s property. Thus, the Sages had the authority to extend the law of Shemitat Kesafim nowadays, denying lenders the right to claim their debts after the Shemita year.
Nowadays, we circumvent this Halacha by signing a Pruzbul document before the end of the Shemita year, whereby we hand our debts over to Bet Din. This allows us to collect our debts after Shemita by the authority of Bet Din.