A History of Bankruptcy

Bankruptcy in Ancient Times

Prior to the 1800s, defaulting on one's debts could result in spending years in debtor's prison, at the very least. In ancient Rome and Greece, debtors could have their entire estates seized. They and their families could be sold into slavery. The debtor might even be executed. The problems that arise between a lender and a debtor were even mentioned in the Bible. The Torah proscribed a pattern of forgiving debts every seven years, while the Koran directed that a debtor be given additional time to repay his debts. Unsurprisingly, Genghis Khan called for the death of anyone who had to declare bankruptcy three times.

The Beginnings of Bankruptcy Regulation

In medieval England, Henry VIII repealed bankruptcy laws allowing the mutilation of debtors and established debtor's prison instead. Elizabeth I created bankruptcy laws that allowed the creditor to initiate the proceedings and seize the debtor's possessions. It was not until after the American Revolution that bankruptcy laws changed to protect the debtor as well as the creditor.

Bankruptcy Laws in the United States

The conflict between advocates of states' rights and the Federal government has been going on since the formation of the United States, and early attempts at regulating bankruptcy law were affected by this conflict. Many individual states imprisoned debtors, as was the custom in England. Bankruptcy affected people of all stations in life, including Robert Morris, one of the signers of the Declaration of Independence, who spent time in a debtor's prison. Ironically, Morris wound up bankrupt because he helped fund George Washington's army.

Bankruptcy Acts enacted in 1867, when the United States was freshly reeling from the economic devastation of the Civil War, and later in 1898 finally allowed the debtor to initiate a bankruptcy action himself and discharge his debts. 

Modern Day Bankruptcy Law

Individuals may now file bankruptcy under Chapter 7 or Chapter 13 of the bankruptcy law. Chapter 7 is most commonly filed because it allows the debtor to liquidate most holdings while keeping personal possessions, completely discharge most of his or her debts and start fresh. Chapter 13 is filed by individuals wishing to retain most of their holdings. Under Chapter 13, a payment plan is filed with the bankruptcy court which designates payments to creditors in order of importance. The debtor makes monthly payments to the bankruptcy court for a period of three to five years and the court pays the creditors. Both Chapter 7 and Chapter 13 can stop a foreclosure if they are filed before the foreclosure takes place. Once bankruptcy is filed, creditors may no longer contact debtors. People who are overwhelmed with medical bills and credit card bills usually choose Chapter 7 in order to wipe out as much of their debt as possible, while people trying to keep property and vehicles may prefer Chapter 13.