Bankruptcy History

Bancus Ruptus

History of Bankruptcy

World History

The evolution of bankruptcy law from early times has been shaped by the conflict between lenders seeking to extract payment from the debtors and/or to punish the bankrupt person as an example to others who might seek to default on their obligations and those who believe that society is better served by providing a fresh start to those unable to pay their debts. This push and pull is demonstrated by the passage of the “debtor’s responsibility act” by congress in 2005, which tightened the availability of the fresh start Chapter 7 bankruptcy, and provided for a forced 5 year repayment plan for certain higher income debtors. Some have suggested that the “means test” is the modern equivalent to forced servitude. Others suggest the measure was necessary to prevent what was perceived as an abuse of the bankruptcy laws by debtors. It may be important to understand a bit of the history of bankruptcy.
It is generally accepted that the word “bankrupt” comes to us from the roman practice of lending. Roman “banks” were benches or tables (bancus) on which the early money lenders would do their business. When a banker failed the bench was broken (ruptus) to signify that he was no longer in business. Thus the broken bench (bancus ruptus) signified the insolvency of the banker.
Many cultures have historically had no support for lending practices. In these cultures if a person lent money or items of value to another it was only the moral responsibility of repayment or return that assured payment. If one failed to repay, the society disciplined the failure to repay by shunning or shaming the debtor. If the reason for the failure of repayment was not the debtor’s fault, then the consequences were less severe. As cultures became less tribal, the society began to develop lending practices and enforcement techniques. The inevitable practice of lenders using abusive lending practices consequently led to laws concerning limitations on interest charges and relief of debt.
In Hebrew scriptures, the Jewish people were prevented from charging each other interest and debts were required to be forgiven every 7 years. Likewise if a Jew sold themselves into slavery to another Jew, he would be released in the 7th year. As such there was no need for bankruptcy laws. Likewise the Qur’anic law forbids interest charges, as has the Christian church at various times since the 1st counsel of Nicaea. The release of indebtedness however generally relied upon the generosity and morality of the lender. In ancient Babylon the Code of Hammurabi had various provisions concerning the enforceability and release of debts. In ancient Greece, Lenders could force the entire household of a delinquent debtor into slavery until the debt was repaid via the physical labor of the members of the family. Some Grecian cities did limit the debt slavery of the family members to a period of five years, and the family debt slaves had legal protection of life and limb. If one was a servant of a debt slave, however the servitude to the creditor could last a lifetime. The history of lending and bankruptcy in eastern culture is less documented, however there are references in the Yassa of Genghis Khan which provided that one who went bankrupt three times would be put to death.
Under Roman per-Imperial law, creditors had the following right concerning debtors unable to pay their debts: “Fasten him in stocks or fetters. He shall fasten him with not less than fifteen pounds of weight or, if he choose, with more. If the prisoner choose, he may furnish his own food. If he does not, the creditor must give him a pound of meal daily; if he choose he may give him more… Three market days later, the creditors were entitled to divide the debtor’s body amongst them… if they cut more or less than each one’s share it shall be no crime.”
It was Julius Caesar who gave the world the genesis of modern bankruptcy laws, including the concept of a release of debt and a fresh start. Caesar, a lifelong debtor, set up laws which allowed moneylenders the power to confiscate land of nobles who were delinquent on debts but ended the practice of selling delinquent citizens into slavery. If property of a noble was seized, the laws required all debt to be wiped clean and allowed the debtor to keep tools of the debtor’s trade and related land. After the collapse of Rome, the papal bankers continued to follow these general principals, and in the era of enlightenment the roman bankruptcy laws were typically reestablished for all citizens as part of the credit system. It is important to remember that at its outset, bankruptcy was the option of the creditor, who could thus force the sale of the debtor’s property to settle the debt owed. The debtors generally did not have the option to enter into bankruptcy voluntarily.
Spain was the first sovereign nation to declare bankruptcy, Philip II of Spain declaring 4 state bankruptcies in 1557. 1560, 1575 and 1596.
The early English bankruptcy laws were not as forgiving as Ceasarian law. In addition to selling all of the debtor’s property, the debtor who still owed debts after the sale of all of the property were thrown into debtors prison. The family of the debtor, if they desired the debtor’s release, then would be required to pay the balance of the debt. It was not until the 1800’s that debtors began to be release from prison terms and debts discharged. Finally in 1825, the English Bankruptcy Act gave a debtor the ability to file a declaration of insolvency, if the creditors agreed then a bankruptcy would take place. Finally in 1849 debtors were given the right to file voluntary bankruptcy, liquidate their property to pay debts and receive a release or “discharge” of the indebtedness.

Bankruptcy in the United States.

The United States Constitution provided the Congress shall have the power to establish “uniform laws on the subject of Bankruptcies”. 11 years after the adoption of the constitution, congress enacted the Bankruptcy Act of 1800, which was limited to traders and only provided for proceedings started by creditors. This act was repealed three years later. The Act of 1941 instituted voluntary bankruptcy in the United States, but was repealed in 1843. In 1867 a third attempt at bankruptcy law was passed in the wake of the civil war and the financial panic of 1857. This act lasts until 1878. Finally in 1889 an The Act to Establish a Uniform System of Bankruptcy was enacted. It was amended in 1933 and 1934 to include reorganization plans, and later in 1938 to provide a menu of options. In 1978 the Act was replaced by a complete rewrite, which became the Bankruptcy Code. The Bankruptcy Code is the present law in the United States. In 2005, the creditor lobby finally succeeded in a major amendment of the Code, to include the means test as a way of forcing more affluent debtors into repayment plans.
Bankruptcy law continues to evolve. To understand the evolution of bankruptcy law is to understand why groups of people came to believe that existing debt collection law was inadequate and to see how those people were able to use courts and legislatures to change the law. In the early nineteenth century demands were largely driven by victims of financial crises. In the late nineteenth century, merchants and manufacturers demanded a law that would facilitate interstate commerce. Unlike its predecessors, the 1898 Bankruptcy Act was not repealed after a few years and over time it gave rise to a group with a vested interest in bankruptcy law, bankruptcy lawyers. Bankruptcy lawyers have played a prominent role in drafting and lobbying for bankruptcy reform since the 1930s. Credit card companies and customers may be expected to play a significant role in changing bankruptcy law in the future.
An excellent resource regarding the history of bankruptcy in the United States is Professor David Skeel’s book “Debt’s Dominion: A History of Bankruptcy Law in America”. Princeton: Princeton University Press. 2001. Professor Skeel suggests that United States bankruptcy law has been shaped by the conflict between organized creditor interest groups and counter prevailing pro-debtor Populist idealology, influenced by legal professionals in the bankruptcy field. Certainly the amendments passed in 2005 were passed at the behest of a strong creditor lobby, and despite strong opposition by legal professionals, including many bankruptcy Judges. Historically pro-debtor legislation has followed financial crisis’s. One may suspect that the amendments of 2005 may be overhauled in the face of the failed banking industry and resulting recession in recent history. This may depend in large part upon the depth and breadth of the resulting recession.

Celebrity Bankruptcy History

Many well known people have filed bankruptcy. To name a few:
Rembrandt; John James Audubon (1819);  P.T. Barnum (1871); Samuel Langhorn Clemens (1893); Walt Disney (1922); Richard Buckminster Fuller (1927); Oskar Schindler (Schindler’sList) 1930’s and 1957; Richard Nixon’s brother Francis Nixon (1961); singer Marvin Gaye (1976); talk show host Larry King (1978); vocalist Cyndi Lauper (1980); relief pitcher Steve Howe (1984); Texas Governor John Connally (1986); pitcher Gaylord Perry (1986);Padres outfielder Tony Gwynn (1987); singer Tammy Wynette (1988); actor Jerry Lee Lewis (1988); Hall of Fame pitcher Rollie Fingers (1989); Vegas showman Wayne Newton (1992); Baltimore Oriole owner Eli Jones (1993); actress Kim Baysinger (1993); LaToya Jackson (1995); skater Dorothy Hamill (1996); actress Ana Nicole Smith (1996); MC Hammer (1996); Burt Reynolds (1996); Mickey Rooney (1996); actress Debbie Reynolds (1997); actor Corey Haim (1997); NFL linebacker Lawrence Taylor (1998); madam Heidi Fleiss (1998); actor Cary Coleman (1999); soprano Lorraine Bracco (1999); boxer Mike Tyson (2003); soap star Lorenzo Lamas (2004); Donald Trump (2004, 2009); WNBA star Sheryl Swoopes (2004); quarterback and dog-fighter Michael Vick (2008); Red Sox player Bill Buckner (2008); center-fielder Lenny Dykstra (2009); comedian and actor Sinbad (1009); actor Stephen Baldwin (2009)

This page was last updated: February 19, 2014