Bankruptcy History

In ancient Greece, bankruptcy did not exist. If a father owed a debt and he could not pay, his entire family (including wife, children, and servants) were forced into “debt slavery”, until the creditor recouped losses via their physical labor. Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb, which regular slaves did not enjoy. After the five year period, the debt slaves were given a fresh start.

The word bankruptcy is often attributed to the Latin words “bancus” (meaning a bench or table) and “ruptus” (meaning broken). A “bank” originally referred to a bench, which the first bankers had in the public places, in markets, fairs, etc. on which they tolled their money, wrote their bills of exchange, etc. Hence, when a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business. As this practice was common in Italy, it is said the term bankrupt is derived from the Italian banco rotto, broken bank.

The characteristic discharge of debts was introduced to Anglo-American bankruptcy with the statute of 4 Anne ch. 17 in 1705, where the discharge of unpayable debts was offered as a reward to bankrupts who cooperated in the gathering of assets to pay what could be paid.

Bankruptcy is also documented in East Asia. The Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

The concept of bankruptcy and fresh start can also be found in religious contexts. In the Torah, or Old Testament, every seventh year is decreed by Mosaic Law as a Sabbath year wherein the release of all debts that are owed by Jews is mandated, while the release of debts owed by non-Jews is purposefully not mandated. The seventh Sabbath year, or forty-ninth year, is then followed by another Sabbath year known as the Year of Jubilee wherein the release of all debts is mandated, for Jews and non-Jews alike, and the release of all debt-slaves is also mandated whether they are of Jewish descent or not.[2] The Year of Jubilee is announced in advance on the Day of Atonement, or the tenth day of the seventh Biblical month, in the forty-ninth year by the blowing of trumpets throughout the land of Israel.

Bankruptcy in the United States was of such importance to the Founders that they referenced it in the Constitution. Bankruptcy is a matter placed under Federal jurisdiction by the United States Constitution (in Article 1, Section 8, Clause 4), which allows Congress to enact “uniform laws on the subject of bankruptcies throughout the United States.” The Congress has enacted statutes governing bankruptcy, primarily in the form of the Bankruptcy Code, located at Title 11 of the United States Code. Federal law is amplified by state law in some places where Federal law fails to speak or expressly defers to state law.