A Brief History of Bankruptcy

Debt has been around for a long time, but it was not until relatively recently that a system was developed in order to help people who had fallen into debt problems. The bankruptcy system was developed in order that creditors may get repaid fairly with whatever money there was and the debtors could have a fresh start.

People in trouble with debt often feel very guilty and defensive. The bankruptcy system was developed because society recognized that just because someone owed money did not make them a bad person - having or not having the ability to repay loans is not related to "good" or "bad" in any way! The bankruptcy system evolved in order that people may have a mechanism for moving on with their lives.

This history of bankruptcy is published here for your interest and enjoyment, and so you can appreciate the current system. For all it's flaws, it's a lot more logical and reasonable then some of the historical alternatives!

The facts from this timeline were first published in an article New York Times on November 16, 2005.

1000 BC - Credit first used in Assyria, Babylon and Egypt.

Ancient Greece - Debtors in Athens were originally thrown into debtor's prison until a good portion of the farming class was in jail and there weren't enough workers to tend the crops.

Ancient Rome - Debtors could be sold into slavery, the money used to pay creditors.

Medieval Italy - A merchant's possessions were auctioned and his trade bench destroyed - literally banca rotta in Italian - if he failed to pay his obligations.

1285 - England's statute of merchants allows imprisonment of debtors.

1542 - The first official bankruptcy law passed during the reign of Henry VIII. Bankruptcy is a crime and debtors are called "offenders."

1570 - Under Queen Elizabeth I, bankruptcy law is clarified. Only creditors can declare a merchant bankrupt. Debtor could be pilloried or have his ear cut off.

1705 - Statute of Anne marks the first attempt at a humane bankruptcy law. With creditors' consent, debt could be discharged following liquidation. Death penalty allowed for fraud in bankruptcy.

1787 - U.S. Constitution includes passage stating that Congress has the power to "pass uniform laws on the subject of bankruptcies." Without federal rules, state laws fill the void.

1800 - The Panic of 1797 in America led to the imprisonment of thousands of debtors, including the "Financier of the Revolution," Robert Morris. As a result, Congress passed the first American bankruptcy law. Similar to English law, it only allowed creditors to declare a person bankrupt. Repealed after three years.

1833 - Federal imprisonment for debt is abolished in the United States.

1841 - Second bankruptcy law, also in the wake of economic disaster, permitted voluntary bankruptcy and included non-merchants. Also short lived, due to high administrative costs and questions of constitutionality.

1867 - Following the Civil War, Northern creditors want a system to collect from Southern debtors. Congress passes a third bankruptcy law that would quickly be repealed.

1898 - The landmark Nelson Act bankruptcy bill is passed. After a century of instability, America has the same bankruptcy law on the books, with amendments, for 80 years. Any indebted individual can declare bankruptcy.

1938 - The Chandler Act amends the nation's bankruptcy provisions, ending protracted Depression-era wrangling over bankruptcy laws. Permanently established Chapter 13 for wage earners - those with the means to do so - to repay debts.

1950 - The first modern or "universal" credit card, the Diners' Club card, is introduced.

1978 - The Bankruptcy Reform Act substantially rewrites consumer and corporate bankruptcy laws, replacing the Nelson Act. Viewed by some at the time as pro-creditor, it nevertheless precedes an explosion in consumer debt and bankruptcies.

1996 - One million Americans file for bankruptcy in a single year.

2005 - After over a decade of study and debate, Congress passes the Bankruptcy Abuse Prevention and Consumer Protection Act. Meant to reduce the number of bankruptcies and encourage repayment, its ultimate effect is unknown. If you are considering bankruptcy, call the Law Offices of Amy E. Clark Kleinpeter to request a free evaluation of your situation by filling out your contact information below.