History of Bankruptcy

Early history of bankruptcy

The word “bankruptcy” is thought to have originated from the Latin bancus ruptus, literally meaning “broken bank”. The bank in this case was in reality a bench where the earliest bankers conducted their business. If said business failed for some reason, then the bank or bench was literally broken into pieces to put the banker out of his misery. In Italy during the Renaissance Period, where the practice was very frequent, the term could also have come from the Italian banco rotto, which also meant “broken bank.” Spain became the first sovereign nation in history to declare bankruptcy, doing so on four separate occasions in 1557, 1560, 1575 and 1596.

Bankruptcy in modern times

Prior to the enactment of modern bankruptcy laws, individuals who failed to honor their debts were either imprisoned, made to repay their debts through manual labor, or worst case, executed.

In 1570, the first bankruptcy law was approved in England. It is generally regarded as the foundation of American bankruptcy laws. Also in 1570 the first bankruptcy statute was passed, brought about by overcrowded debtors' prisons which was creating a national problem in England. In the Unites States, a federal bankruptcy law was enacted in 1800 but repealed three years later. A new law was passed again in 1841 but repealed two years later. This pattern of enacting and repealing would continue for much of the 19th century. The Bankruptcy Act of 1898 ushered in the modern era of liberal debtor treatment. Two major overhauls were done in 1938 and 1978.