Banca Rotta: A Brief History of Bankruptcy Part One

Bankruptcy as a codified forgiveness of debt is at least as old as the Biblical book of Deuteronomy, which may have been first written in 1400 BCE.  Chapter 15 verses 1-3: “At the end of every seven years thou shalt make a release and this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release. Of a foreigner thou mayest exact it again: but that which is thine with thy brother thine hand shall release.” (King James Version)

The Greeks had a more draconian version of debt “forgiveness” in debt slavery. If a debt was owed and not repaid, the Debtor and his entire family – children included – worked as a slave of the Creditor until the debt was paid off. Debtor slaves had more rights than non-Debtor slaves – for example, as to the right not to be physically harmed by their master.

The Code of Law created by Genghis Khan included provisions for bankruptcy.

The United States bases its federal rules and statutes on English law, as do most of the states except Louisiana. The first statute under English law dealing with bankruptcy was in 1542 under Henry VIII called the Statute of Bankrupts; An Acte againste suche persones as doo make Bankrupte.

The Statute allowed for the liquidation all of the Debtor’s possessions and paid his Creditors their proportional share based on their debt. It also allowed for imprisonment of the Debtor.

This law only applied to merchants who owed money through their businesses.

In 1705 the bankruptcy laws were changed to allow a discharge of the debts owed if the Debtor cooperated during the bankruptcy proceeding. A Debtor was even allowed to keep some of the funds from the liquidated estate.

Bankruptcy law was established in the United States by the Constitution in Article 1, Section 8, Clause 4. It gave the federal government exclusive control of bankruptcy laws and rules.

The first US bankruptcy laws were passed in 1800, and then only due to a financial crisis in 1797. It was similar to the British laws at the time: it was involuntary (a Creditor initiated the bankruptcy filing) and focused on businesses and merchants. A federal judge and two-thirds of the creditors had to approve the Debtor’s discharge. The Bankruptcy Act of 1800 was repealed in 1803 – it was a temporary act and due to expire after five years regardless. 

It would be forty years before there would be another federal bankruptcy law.

I’ll talk about that in Part 2.

Copyright 2016 Michael Curry