The consumer in America today has a constitutional right to file bankruptcy, but that has not always been the case.
Modern bankruptcy laws forgive a debt either by canceling the debt out right (chapter 7) and giving the consumer a “fresh start” or by letting the consumer choose the amount to pay and the time frame in which to re-pay the debt (Chapter l3).
The idea of debt forgiveness is biblical and dates back to the Old Testament. Moses referred to a Jubliee or Holy Year which took place every 50 years when all debts were to be forgiven. Israelites who had sold themselves into slavery were freed. Deuteronomy 15:1-2 expanded the concept of debt forgiveness by stating that at the end of 7 years all debts would be canceled. Today Chapter 7 is the most common form of bankruptcy. L Levinthal, ‘The Early History of Bankruptcy Law’ (1918) 66(5) University of Pennsylvania Law Review 223. See also, Leviticus 25:8-54
The word “bankruptcy” derives from a mixture of Latin words: Bank comes from the Latin word “bancus” which meant bench or table. In the dawn of bankruptcy law the banker conducted his business in the marketplace or common area on a bench. If he could no longer meet his financial obligations the bench was broken (from the Latin word “ruptus”) to show one and all that the merchant or banker could not pay his debts and could no longer do business. In medieval Italy the bancus ruptus became banco rotto for broken bank but by that time bancus ruptus or “bankrupt” had become a permanent part of the language.
In its most simple terms bankruptcy means to cancel or to “discharge” unpaid debts but in the classical ancient world the notion of debt forgiveness was unknown. In ancient Greece, for example, if a man owed a debt that he could not pay, his entire family, including the family’s slaves, became “debt slaves”. The family, as “debt slaves”, were protected from a punishment that involved bodily harm and, generally, the debt slavery period could not exceed 5 years.
In ancient Rome the penalties for not paying debts were much harsher; those who could not pay their debts were executed.
Such harsh laws continued to exist even after the first bankruptcy laws were passed in Great Britain under Henry VIII (of 6 wives and Ann Bolyn fame) in 1542. If a person could not pay his or her debts he or she was considered a criminal subject to the full weight of the law. As in ancient times, criminal punishment covered the gamut from being put in debtors’ prison to being sentenced to death.
In the early 1700’s the thinking began to slowly change in favor of aiding a debtor to start over. Statute 4 Anne ch. l7 in England provided that un-payable debts would be discharged if a debtor agreed to pay what he could.
The British concept of debtors’ prison made its way to America with the founding of the colonies. Our puritan forefathers believed that defaulting on ones’ debts was a moral failing. Owing as little as 40 shillings which was less than the price of a good pair of bed sheets would land one in debtors’ prison.
Financial turmoil often follows wars and the end of the Revolutionary War was no exception. The nation was going to need laws that would make it easier to forgive debt and move forward into a new business environment in an orderly fashion. Nevertheless it took until the early l800’s to finally banish debtors’ prison. The first federal bankruptcy law, patterned after English statutes, was signed in l800.
Some say bankruptcy is as American as apple pie and with the birth of the nation came modern bankruptcy laws. Early bankruptcy laws weighed heavily in favor of the creditor and were often quite harsh toward the one filing bankruptcy. Those early laws focused on recovering investments for creditors and, unlike now, almost all bankruptcies were involuntary. Modern bankruptcy laws emphasize rehabilitation or reorganizing debtors in distress with a limited emphasis on punishment of the debtor. Time Magazine, “A Brief History of Bankruptcy” .
In 1978 the Bankruptcy Reform Act substantially revamped bankruptcy practices. It continues to serve as the uniform federal law that governs all bankruptcy cases today, despite having been amended several times since its enactment.
Of note was the l986 passage of Chapter 12, created to meet the needs of a family farmer or a family fisherman. For example, family farmers facing bankruptcy now have a chance to reorganize their debts and save the family farm. This is especially important now in a time of severe drought .
The l980’s and early l990’s saw a record number of bankruptcies of all types. Many large and well known companies filed for Chapter 11 reorganization.
While there have continued to be many changes in the bankruptcy laws, the most notable change was the Bankruptcy Abuse Prevention and Consumer Protection Act [BAPCPA] which governs current bankruptcy filings. This new law substantially amended the Bankruptcy Code by making it more difficult for a person to file a Chapter 7. The new law, a throwback to harsher times, in many ways tends to favor the creditor over the consumer. See generally, Michael Simkovic, “The Effect of BAPCPA on Credit Card Industry Profits and Prices” Berkeley Business Law Journal, Vol. 6, No. 1, Spring 2009.
In 2008 more than 96% of all bankruptcy filing were personal, not business, and of those personal filings, about 2/3 were Chapter 7’s which provide a “fresh start” to the consumer. The majority of personal bankruptcies involve substantial medical bills. In fact, The American Journal of Medicine reports that 3 out of 5 personal bankruptcies are due to medical debt but unemployment is also a major reason many people file bankruptcy. ^ See generally 18 U.S.C. § 1962 and 18 U.S.C. § 1963.
A lawyer is needed more than ever to steer a consumer toward financial recovery and a fresh start. The firm of Seaton & Lohr is not only familiar with the intricacies of modern bankruptcy law but also brings years of experience to the aide of their clients.
1. A Brief History of Bankruptcy, by Laura Fitzpatrick, June 15, 2009.