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Bankruptcy: A Historical Perspective

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The bankruptcy laws have changed drastically throughout the course of history in both America and abroad. You would probably be surprised to discover that insolvency and bankruptcy far predate the woes of today’s U.S. citizens.

In this infographic, you’ll learn the origins of bankruptcy, how it has evolved over the years, and which laws are currently governing bankruptcy in America.

Bankruptcy: A Historical Perspective

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Bankruptcy: A Historical Perspective

Bankruptcy laws have changed drastically throughout the course of history in both America and abroad. You would probably be surprised to discover that insolvency and bankruptcy far predate the woes of today’s U.S. citizens. In this infographic, you’ll learn the origins of bankruptcy, how it has evolved over the years, and which laws are currently governing bankruptcy in America.

The Bible

What does the bible say about bankruptcy?

Exodus 22:25-27

If you lend money to one of my people among you who is needy, do not treat it like a business deal; charge no interest. If you take your neighbor’s cloak as a pledge, return it by sunset, because that cloak is the only covering your neighbor has. What else can they sleep in?

Exodus 15:1-2

At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release.

Early Bankruptcy Laws

Where did the term bankruptcy come from?

  • It stems from the Italian word for broken bench, banca rotta.
    • Traditionally, tradesman who could not pay their debts had their work bench broken as punishment.

Romans were very harsh to debtors.

  • A creditor could obtain the indebted estate, sell the debtor’s possessions, and distribute the funds to any other creditors that were owed.
  • Debtors did not have civil rights during this process.
  • Debtors were able to petition a magistrate to voluntarily relinquish their assets to prevent undue hardship.

The Middle Ages

Medieval Italian cities punished their insolvent citizens without mercy.

  • Due to issues with merchants purposely fleeing or fraudulently causing insolvency, governments would inflict harsh punishments on their citizens.
    • In addition to severe penalties, a debtor's estate was liquidated.
  • Similar laws were passed throughout Europe in the centuries that would follow in places such as:
    • France: Ordonnance du Commerce of 1673
    • Flanders: Decree for the Administration of Justice and Good Order of 1531
    • Antwerp: The Customs of Antwerp of 1582
    • Spain: Ordinances of Bilbao of 1737
    • England: The "Acte againste suche persones as doo make Bankrupte," of 1542 and 1543. Replaced by a more in-depth act in 1571, which targeted merchants and traders.

Modern Bankruptcy

America

Voluntary insolvency laws were created in 1841 for U.S. citizens.

The Bankruptcy Acts of 1867 and 1898

  • These acts gave Americans the ability to file for bankruptcy and eliminate their debt completely.

Bankruptcy Acts of 1933 and 1934

  • To help further protect companies from bankruptcy, this law was passed during the Great Depression though it was later superseded by the Chandler Act of 1938.

The Bankruptcy Reform Act of 1978

  • This bankruptcy act gave consumers and corporations the ability to declare bankruptcy with greater power and and control. Additionally, it created Chapter 7 and Chapter 13 bankruptcy.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

  • Creditors were allowed to push businesses or individuals to declare bankruptcy via a petition for involuntary bankruptcy.
  • Debtors were able to:
    • Freeze debt collection attempts.
    • Have their debt consolidated.
    • An interest rate reduction on secured loans.
    • Have unsecured loans completely dismissed.

Conclusion

Bankruptcy laws have changed throughout the years and differ greatly from biblical, Roman, and medieval times. Today’s bankruptcy laws in America have completely changed how U.S. citizens are able to clear their debts and turn their lives around.


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