Bankruptcy history
Bankruptcy is defined as “the legally declared inability or impairment of the ability of an individual or organization to pay its creditors.” Although not such a pleasant experience, it is often an unavoidable step that allows the debtor to start over and the creditor to recover at least part of the debt. Bankruptcy has received widespread coverage recently, especially with the worst recession since the Great Depression of 1929 attacking the world economy. However, the history of bankruptcy goes back at least 500 years in medieval England.
Before embarking on a journey through time to trace the roots of bankruptcy, it is important to know the origin of the word. The word “bankrupt” comes from the ancient Latin bancus (bench or table) and ruptus (broken). Ancient bankers conducted their business on a bench in public places such as markets and fairs. When a banker failed, his bench (bancus) was broken (ruptus) to advertise to the public that he was no longer able to do business. Even today, the word “bankruptcy” means the inability of a person or company to do business.
The first bankruptcy law was passed in England in 1542 during the reign of Henry VIII and was heavily biased against the debtor where he could be imprisoned and all his assets confiscated. Over time, the law was relaxed to allow debtors to be released from prison, many of whom promptly fled to debtor colonies in Georgia and Texas. Although imprisonment became less common in the 1800s, secret bankruptcy (agreed between creditor and debtor) became legal in 1825. Voluntary bankruptcy was allowed in England in 1849.
When the United States Constitution was adopted in 1789, bankruptcy was specifically mentioned as a subject of federal law. The first bankruptcy law in the US was passed in 1800 and only provided for involuntary proceedings. Voluntary bankruptcy was legalized in 1841 and its scope was expanded by subsequent laws in 1898 and 1938. The Bankruptcy Reform Act of 1978, known as the Bankruptcy Code, made major changes to bankruptcy law.
There was considerable confusion about the overlapping and conflicting jurisdictions of the new court structure and the courts had to adopt an “Extraordinary Rule”. This rule remained in effect until the 1984 legislation took effect on July 10, 1984, when the Bankruptcy Amendment Act and the Federal Judges Act were implemented. The new bankruptcy courts were therefore permitted to exercise all the subject matter jurisdiction of the district courts, subject to certain limitations.
In 1986, the United States Bankruptcy Judges, Trustees, and Family Farmer Act made significant changes to family farmers and created a system of permanent trustees. In recent years, the Bankruptcy Reform Act of 1994 has introduced changes affecting the mortgage banking industry. There are currently six types of bankruptcy under the Bankruptcy Code, found in Title 11 of the United States Code:
1. Chapter 7 – Direct Basic Liquidation Bankruptcy.
2. Chapter 9 – Municipal bankruptcy for the resolution of municipal debts.
3. Chapter 11 – Corporate Restructuring Bankruptcy.
4. Chapter 12 – Family Farmers and Fishermen Bankruptcy.
5. Chapter 13 – Bankruptcy of a Wage Earner.
6. Chapter 15 – international bankruptcy to allow foreign debtors to clear debts.
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