There is no single point in time when “bankruptcy” was born. It is rather a legal and social concept which has evolved from ancient customs and law into today’s modern law.
In ancient times one paid cash for what ever he wanted. By necessity some sellers of goods extended credit to the buyers based on the seller’s assessment of the buyer’s ability and willingness to repay and confidence in local customs and law which allowed him to recover in the event the buyer failed or refused to pay.
In ancient India a debtor who could not repay a debt was pressured by religious and social sanctions to go without food and place himself in the creditor’s doorway even unto death. Another cute custom was for the debtor to pledge the body of a close deceased relative. So, if you didn’t pay back a debt the creditor could dig up your father’s grave and take the body until you paid. Primitive Greek law allowed debtors to take a creditor’s wife, children or cattle or his home. Under the Code of Hammurabi, the debtor, his family and friends could be sold into slavery. The Egyptian law put an end to the family and friends thing and allowed only execution against the creditor who could be beat, killed or sold into slavery. Roman law followed the credo, “he who cannot pay with his purse pays with his skin.” Those were tough times for the creditor.
Over a thousand year or so, society, law and custom changed from from execution against the person to execution against the debtor’s estate in its entirety. Now you didn’t have to worry about loosing your family, being killed or working in a slave camp for life, but you were assured of loosing your home and everything in it. Many of the ideas in today’s modern bankruptcy law found form in Roman times. The word bankruptcy comes from two Latin words, “bancus” which means bench or table and “ruptus” meaning “broken.” In these early times, people gathered daily at the local open air markets to conduct business. Vendors would set up their businesses either on tables or benches so shoppers could see and purchase the goods or services. If the vendor could no longer pay his debts, his table or bench was broken into pieces to convey the message to all that he was no longer in business. In those times it was not uncommon for one to operate a line of credit based on one’s word of honor, today known as an unsecured creditor. If the debt was paid the creditor was allowed to resume business. Thus, the term bankruptcy combines bancus and ruptus or in other words, your bench is broken and you are no longer in business.
Spanish law, sanctioned in 1590, allowed the debtor’s estate to be placed in the hands of judges for sale and distribution among creditors. If there was not enough to satisfy the creditors, off to prison you would go until they were all paid off. The good news was that you weren’t dead and the bad news was that Spanish prisons are pretty bad places.
Fast forward to 1776 and the United States Constitution (Article 1, Section 8, Clause 4) which authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” Fast forward again to 1978 when Congress exercised this authority by adopting the Bankruptcy Reform Act, codified in Title 11 of the United States Code and commonly referred to as the “Bankruptcy Code” (“Code”). The law is not perfect but it’s a good start.
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Last Edited on July 31, 2015