We are learning about taking a משכון and my students wanted to know, at what point can the lender keep the משכון? Also does it make a difference if, even though that limit has passed, but the borrower is claiming that he will pay up, do we take this into account?
There are two types of mashkon (collateral): A mashkon taken for purposes of collecting the loan in cases of non-payment.
If a person takes a mashkon for purpose of collecting the debt (which is the standard today), the mashkon can be kept by the creditor if the borrower fails to pay back the loan on time. However, this is not always a simple procedure.
If the creditor wishes to collect his money by selling the mashkon, the mashkon must be evaluated by a panel of three experts, and only then can it be sold (Shulchan Aruch, Choshen Mishpat 73:15 and Ketzos). Alternatively, it can be sold with the involvement of beis din (Shach).
There are however methods whereby one can collect a debt from the mashkon without having it evaluated.
When arranging the loan, the lender can tell the borrower that if the loan is not paid when due, the borrower agrees to rely on the lender’s evaluation of its worth (Pischei Choshen, Vol. 1 pg. 145).
An alternative way is for the lender to tell the borrower at the time of the loan that if the loan is not paid by the day the loan is due, then retroactively this is not a loan but a sale. The mashkon then becomes the creditor’s in exchange for the loan money. This is permitted even if the mashkon is worth more than the loan (Shulchan Aruch, Choshen Mishpat 73:17).