Bankruptcy history
Bankruptcy is defined as “the inability or impairment of the legally declared ability of an individual or organization to pay its creditors.” While it is an unpleasant experience, it is often an unavoidable step that allows the debtor to start over and the creditor to recover at least some of the debt. Bankruptcy has been heavily covered in recent times, especially with the worst recession since the Great Depression of 1929 hitting the world economy. However, the history of bankruptcy dates back at least 500 years in medieval England.
Before we embark on a journey through time to trace the roots of bankruptcy, it is important to know the origin of the word. The word “bankrupt” originates from the Old Latin bancus (bench or table) and ruptus (broken). Ancient bankers used to conduct their business in a bank in public places like markets and fairs. When a banker failed, his bank (bancus) broke (ruptus) to announce to the public that he was no longer in a position to do business. Even today, the word “bankrupt” means the inability of an individual or company to do business.
The first bankruptcy law was enacted in England in 1542 during the reign of Henry VIII, and it was heavily biased against the debtor, where he could be imprisoned and all his property seized. Over time, the law was relaxed to allow debtors to get out of jail, many of whom quickly fled to debtor colonies in Georgia and Texas. Even as incarceration became rarer in the 19th century, collusive bankruptcy (agreed to by creditor and debtor) became legal in 1825. Voluntary bankruptcy was authorized in England in 1849.
When the United States Constitution was adopted in 1789, it was specifically mentioned that bankruptcy was subject to federal law. The first bankruptcy law in the US was passed in 1800 and provided only for involuntary procedures. Voluntary bankruptcy was legalized in 1841 and its scope expanded with subsequent legislation in 1898 and 1938. The Bankruptcy Reform Act of 1978, commonly known as the Bankruptcy Code, introduced major changes to bankruptcy law.
There was considerable confusion over the overlapping and conflicting jurisdictions of the new judicial structure, and the courts had to adopt an “Emergency Rule”. This rule remained in effect until the enactment of the 1984 legislation on July 10, 1984, when the Federal Bankruptcy and Court Amendments Act was implemented. Consequently, the new bankruptcy courts were allowed to exercise full jurisdiction over the matter of the district courts, subject to certain limitations.
In 1986, the bankruptcy judges, the United States trustees, and the family farmer bankruptcy law made considerable changes regarding family farmers and established a permanent trustee system. In recent years, the Bankruptcy Reform Act of 1994 has enacted changes that affect the mortgage banking industry. Currently, there are six types of bankruptcies under the Bankruptcy Code, located in Title 11 of the United States Code:
1. Chapter 7 – Direct Bankruptcy by Basic Liquidation.
2. Chapter 9 – Municipal bankruptcy to resolve municipal debts.
3. Chapter 11 – corporate bankruptcy by restructuring.
4. Chapter 12 – Bankruptcy of family farmers and fishermen.
5. Chapter 13 – Bankruptcy of wage earners for people with regular income.
6. Chapter 15 – International bankruptcy to allow foreign debtors to settle debts.