Question: My father, who was not observant, passed away recently and I inherited from him an interest-bearing loan to another Jew. Do I have to return the interest which my father already received? Is there a way to collect future interest payments?
Answer: In order to answer your questions we must first determine the halachic status of the loan. As you describe it, the loan is in violation of the Torah’s prohibition to grant or collect an interest-bearing loan.
The law (Bava Metsia 61B) is that in general one who collected interest on such a loan must return the money. However, it is important to note the source of this obligation. The Gemara (ibid 62A) derives this obligation from the pasuk (Vayikro 25, 36) Vechai ochicho imoch – your fellow-Jew (the borrower who paid interest) should live with you. The Gemara explains that the pasuk is teaching us that the reason to return the money is in order to prevent the borrower from becoming impoverished. We see that we do not treat the interest which was collected as stolen money because then the reason the lender would need to return the money is because it isn’t his money. The Rashba (Commentary to Bava Kama 112A) explains that this pasuk is the source for the Gemara’s ruling that only the lender must return the interest which he collected, but his heirs do not have an obligation to return interest which was collected by their father, because the injunction to help the borrower maintain his livelihood was given just to the lender.
Thus the Shulchan Aruch (Yoreh Deah 161, 6) rules that children needn’t return interest which was collected by their father.
However, your situation is a bit more complicated because part of the principal is still outstanding assuming the usual practice of considering the payments to have been part interest and part return of principal. R. Akiva Eiger (Responsa vol 1, Responsum 80, referenced indirectly by Pischei Teshuvo (161, 3)) and the Machane Ephraim (Ribbis Chapter 3) both have a doubt whether one can consider the portion of the money already collected as interest to have actually been interest and thus he can collect the entire remaining principal, or he must consider all the money already collected as repayment of the principal, including the portion that had been intended as interest, and therefore the remaining principal is reduced by the full amount of intended interest which was paid by the borrower.
- Akiva Eiger proves that at least the Ran maintains that the principal has been reduced by the full amount paid. The Machane Ephraim says that it is a dispute among the Rishonim. Rav Moshe Feinstein (Yoreh Deah 3, Note 23 to Hilchos Ribbis) rules that the principal has been fully reduced. Therefore, (since when in doubt one cannot force someone to pay) you must reduce the principal by the full amount your father received even if part was intended as interest.
Your second question is whether you may collect any interest on the amount which is still outstanding i.e. the reduced principal. The issue that needs clarification is whether there is a way to convert the interest-bearing loan made by your father into an investment from now on. The reason why one can have a doubt is that perhaps since the borrower already has the money as a loan, one cannot change it.
The answer is that one cannot just change it with a verbal agreement but it can be changed with a formal kinyan. This is ruled by the Shulchan Aruch in a number of places (See Choshen Mishpat (176, 1), (344, 1) and Shach in Yoreh Deah (177, 41). Therefore, you can make a shtar iskah where the principal is the amount outstanding on the loan and the return is specified and when you sign the shtar iska the borrower must make a kinyan sudar (the fact that sudar works is ruled by Chavos Da’as (177, 6)) like one makes with a rabbi when he appoints a rabbi to be his agent to sell his chametz. The former borrower should give you an object which you raise and this formal act transforms what was an interest-bearing loan into an iska governed by the shtar iska which the two of you sign.
It is very important that you explain to the borrower that it is no longer a loan, and if he does not earn a profit and can prove it as specified in the iska document he will not have to give you any profit and if he loses the principal and can prove that he will not even be liable for the principal. According to everyone that is what should be done, and according to some the heter iska is not valid otherwise. See Divrei Sofrim pp 341-343 for a lengthy discussion.
It should be noted further that the Mishna Lamelech (commentary to Hilchos Malveh Veloveh (8, 5)) and Chavos Da’as (161, 5) rule that if either you or he does not want to turn it into an iska you can ask for immediate repayment of the amount outstanding. The reason is because you can claim that the loan was only extended because the lender had the mistaken impression that he may earn a profit (interest) and now that you realize that it is forbidden by the Torah to take interest, you want the loan returned. This is so even though the loan was originally extended by your father, since even if he ignored it, the truth of the Torah was true for him as well.