Bankruptcy – A History

An Ancient Practice

The word ‘bankrupt‘ is actually formed from the ancient Latin bancus (a bench or table), and ruptus (broken). A ‘bank’ originally referred to a bench, which the first bankers had in public places, in markets, fairs, etc. on which they tolled their money, wrote their bills of exchange, etc. When a banker failed, he broke his bank, to advertise to the public that the person to whom the bank belonged was no longer in a condition to continue his business. As this practice was very frequent in Italy, it is said the term bankrupt is derived from the Italian banco rotto, or broken bank.

In Ancient Greece, bankruptcy did not exist. If a man owed and he could not pay, he and his wife, children or servants were forced into “debt slavery”, until the creditor recouped losses via their physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb, which regular slaves did not enjoy. However, servants of the debtor could be retained beyond that deadline by the creditor and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.

Bankruptcy through the Ages

The first real Bankruptcy Act came into effect in 1571. To begin with only traders and craftsmen were allowed to be declared bankrupt. Everyone else would be imprisoned if they didn’t pay their debts! Then a new act was initiated in 1869, allowing all insolvent debtors to petition for bankruptcy. This is still the case today, meaning anyone in a position of insolvency can declare themselves bankrupt.

Phillip II of Spain had to declare four state bankruptcies in 1557, 1560, 1575 and 1596. In fact Spain became the first sovereign nation in history to declare bankruptcy.

Under the rule of Genghis Khan, it was stated that the death penalty would be punishment for anyone who became bankrupt three times!

From a religious context, bankruptcy is even noted in the Torah – or Old Testament – where it is said that every seventh year was decreed by Mosaic law to allow the release of all debts owed by Jews, while the release of debts owed by non-Jews were denied. The seventh Sabbath year, or forty-ninth year, was then followed by another Sabbath year known as the Year of Jubilee, which allowed the release for both Jews and non-Jews.

Bankruptcy Today

More recently, Bankruptcy was reassessed in April 2004, following several changes made to Bankruptcy law in the 2002 Enterprise Act, including reducing the duration of the bankruptcy term from two or three years to a maximum or 12 months (and in many cases now even less). The period allocated for the courts to realise assets has also been limited to three years.

(Sources – http://www.wikipedia.com/ , http://www.insolvency.gov.uk/ http://www.nationalarchives.gov.uk/ )