History of Bankruptcy

Failure of John Law's Mississippi Company led to French national bankruptcy in 1720.

Bankruptcy is a formal process through which people or companies who cannot pay debts to lenders may seek relief from some or all of their obligations. In most jurisdictions, bankruptcy is inflicted by court orders, often instated by the debtor.

Bankruptcy is legally defined as “a declared impairment or inability of the ability of an organization or individual to pay its lenders.” Though a less-than-pleasant experience, it is often a certain step that enables the borrower to make a fresh start and the lender to recoup at least part of the money. Bankruptcy has received coverage in recent times, particularly with the worst recession since the Great Depression of 1929 CE assailing the world economy. However, the history of bankruptcy records back thousands of years.

Before we explore the bankruptcy’s history, it is necessary to know the origin of the word, the word “bankrupt” arises from the Latin bancus (table or bench) and ruptus (broken). Early bankers used to carry their business at a bench in public places like fairs and marketplaces. When a banker failed, his bancus (bench) was ruptus (broken) to communicate to the public that he was no longer in a position to do business. Even today, the word “bankrupt” means the failure of a company or an individual to do business.

In Ancient Greece, formal bankruptcy did not exist. If a person owed and could not pay, he and his wife, kids, or helpers were pushed into “debt slavery” until the creditor recovered losses through their physical labor. Many city-states in old Greece confined debt slavery to five years; debt slaves had the protection of limb and life, which regular slaves did not enjoy. However, the debtor’s dependents could be held beyond that deadline by the creditor and were often required to serve their new lord for a lifetime, generally under harsher conditions.

The first modern bankruptcy law was passed in England in 1542 CE during the reign of Henry VIII, and was massively biased against the debtor where he could be jailed, and all his money and land seized. With time, the law was loosened to allow borrowers out of prison, many of whom immediately fled to the debtor’s colonies in Texas and Georgia. Even as imprisonment became more limited in the 1800s, collusive bankruptcy (agreed upon by debtor and creditor) became legal in 1825 CE. Voluntary bankruptcy was authorized in England in 1849 CE.

When the modern United States Constitution was adopted in 1789 CE, pioneers clearly mentioned bankruptcy as being subject to federal law. The first US bankruptcy law was established in 1800 CE and provided only for uncontrolled proceedings. Voluntary bankruptcy was approved in 1841 CE, and its scope expanded by succeeding legislation in 1898 CE and 1938 CE. The Bankruptcy Reform Act of 1978 CE, known as the Bankruptcy Code, made significant changes to bankruptcy law.

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