The Halacha of "Shemitat Kesafim" cancels debts owed to a person that have not been paid by the end of the Shemita (seventh, or "sabbatical") year. This Halacha applies both in Israel and in the Diaspora, and even nowadays, albeit on the level of Rabbinic enactment (as opposed to Torah law).
In presenting this Halacha, the Torah writes that debts are cancelled "Miketz Sheba Shanim" – "at the end of every seven years" (Debarim 15:1), which implies that the annulment takes effect immediately at the conclusion of the Shemita year, with the onset of Rosh Hashanah. Hence, a lender may collect debts throughout the Shemita year; it is only once the year ends that he may not collect his debts.
"Shemitat Kesafim" applies regardless of whether the lender and borrower signed a contract, or made a verbal agreement. It also makes no difference whether or not the borrower gave the borrower a lien on his property as part of the agreement.
If the borrower repaid the loan by giving the lender a check, this does not constitute payment until the check is deposited. Therefore, if the lender did not deposit the check by the end of the Shemita year, the loan is cancelled and he may no longer deposit the check. This applies even to bank checks. Since a check is merely a commitment to pay, rather than payment itself, the borrower is not considered to have repaid the loan until the lender deposits the check.
If the borrower had given an item as collateral to the lender, then the lender is considered to have already collected the value of the collateral. For example, if the borrower gave an article valued at $500 as collateral for a $1,000 loan, the lender may demand payment of $500 after the Shemita year, as that amount of the loan was not affected by the law of "Shemitat Kesafim." This is the ruling of the Shulhan Aruch (Hoshen Mishpat, 67:12).
Later (ibid. 67:14), the Shulhan Aruch rules (based on the Mishna in Masechet Shebi’it) that the law of "Shemitat Kesafim" does not apply to money owed to a storekeeper for merchandise purchased on credit. If a person has a bill at the local grocery, for example, he must pay that bill even after the Shemita year. The reason is that "Shemitat Kesafim" does not apply to loans that are not due until after the end of the Shemita year. Only debts that the borrower was required to pay before the Shemita year ended are affected by this Halacha. Since shopkeepers commonly allow their customers to buy on credit and pay at some unspecified point in the future, a customer’s debt is akin to a loan that is not due until after the Shemita year. Therefore, the debt is not erased at the end of Shemita, and the customer must pay his debt.
Of course, people nowadays generally sign a Prozbul document which allows one to collect his debts after Shemita.
Summary: The end of the Shemita year cancels all debts, regardless of whether the loan was made verbally or in a written contract, and even if the borrower had paid the lender with a check but the check was not deposited before Rosh Hashanah. If the borrower had given the lender collateral, the lender may collect the value of the collateral after Shemita. This Halacha does not apply to one’s credit at stores, which he must pay even after Shemita.
Visit www.iTorah.com to download the Prozbol form.