The Long and Storied History of Bankruptcy - John T. Orcutt - Debtors' Prisons to Means Tests

The Long and Storied History of Bankruptcy

Submitted by Rachel R on Fri, 06/07/2013 - 1:35am

The Long and Storied History of Bankruptcy

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Have you ever wondered how bankruptcy laws were initially developed and why? It’s actually an amazing journey once you discover the history behind the concept of bankruptcy and then look at how far the laws have come.

Bankruptcy Beginnings

The official history of bankruptcy can be traced all the way back to Biblical times. In fact, there are passages in both the Old and New Testaments of the Bible counseling lenders on how to deal with those who owe them money, urging them to forgive debtors. Two verses in particular play a huge role in how our modern bankruptcy laws are set up. Deuteronomy 15:1-2 states, “At the end of every seven years you must cancel debts; this is how it is to be done. Every creditor shall cancel the loan he is made to his fellow Israelite. He shall not require payment from his brother, because the Lord’s time for canceling debt has been proclaimed.” These is where modern law makers came up with the seven year rule, stating you must wait seven years between bankruptcy filings.

The word “bankruptcy” actually comes from the Latin words for “broken bench”, or ruptus bancus. In Roman times, merchants conducted business and exchanged money from a bench in a central marketplace. When merchants got behind on their debts, Roman creditors had the right to destroy his bench. It was a signal to customers in the marketplace that this particular merchant was in financial trouble, which basically stopped him from conducting business. When citizens of Rome were extremely behind on their debts, they were forced to become slaves for their lenders or even hanged.

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In Medieval times, bankruptcy laws weren’t much better for the citizens. For example, Henry VIII of England passed a law in 1542 that put an end to the previous trend of mutilating or beheading debtors and instead opted to banish them to debtor’s prisons. Within just a short time, England’s debtors’ prisons were filled to capacity. Soon after, Elizabeth I passed the bankruptcy reform laws of 1570, which created the first bankruptcy proceedings within a courtroom. Bank appointed trustees were also given the right to break into a debtor’s home and take all of his possessions, which were later sold in order to pay back the creditors. Some of Elizabeth’s laws would eventually provide the foundation of early American bankruptcy legislation.

The American Idea of Bankruptcy

Before the United States won its independence from England and during its infancy as a new nation, there were no rules as to how debtors would be handled. When problems arose, individual states were forced to make their own decisions about citizens who were behind on their debts. As you can imagine, each state had completely different laws and methods. Generally speaking, most states went with what they knew…which was the English method of tossing people into a debtors’ prison once they defaulted on loans. The debtors’ prison practice was so common in early American life that many prominent citizens found themselves doing time.

During the 1800’s, ideas took a major shift. Suddenly, there was concern about providing true relief to citizens instead of locking them in jail and throwing away the key. This was especially true after the Civil War. Bankruptcy legislation became so important after the war because it was such a financially draining time for most, if not all, Americans. The time gave birth the Bankruptcy Acts of 1867 and 1898, letting Americans choose to initiate their own bankruptcies and completely wipe out their debts.

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Our Modern Bankruptcy Laws

Before the 1900’s, bankruptcy laws generally favored the creditor. The process was more focused on recovering a creditor’s money or property than giving a debtor a fresh start through a bankruptcy discharge. Thankfully, over the last century, bankruptcy laws have made changes that tend to help debtors to reorganize and begin again. After the Great Depression, Congress enacted the Bankruptcy Act of 1933 and 1934. The Act aimed to provide debtors with true forms of relief from their financial burdens.

Since then, many changes have been made to our bankruptcy laws. The biggest changes came in 2005. On April 19, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President George W. Bush. It was created to put an end to abusive bankruptcy filings. The goal was simple: Instead of allowing everyone to file Chapter 7 bankruptcy and have all their debts wiped discharged, those debtors with the financial ability to pay back a portion of their debts would now be forced into filing a Chapter 13 bankruptcy. The Act also increased the amount of time you must wait between bankruptcy filings to eight years and requires you to pass a means test to ensure your income falls below the median income of the state you reside in.

If you find yourself unable to make ends meet and harassed by collection agencies, filing for Chapter 7 or Chapter 13 bankruptcy may be your best option. Speak with a trusted North Carolina bankruptcy attorney today and discover how filing for bankruptcy protection can help.

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