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The Origins of Bankruptcy Tracing Back to Old Testament

May 9, 2014 by  
Filed under Blog

The origins of bankruptcy can be traced back to the Old Testament where, in Deuteronomy 15 v1-3, the debts of all members of the community are to be released every seven years. The name of this release was the Lord’s release. Deuteronomy provides as follows: “At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel the loan he has made to his neighbor. He shall not require payment from his neighbor or his brother, because the Lord’s time for canceling debts has been proclaimed.”
Moreover Leviticus 25:8 provided that every 49 years there would be a Jubilee where everyone’s land and all possessions were returned to them and all debt slaves were released.
The law of Moses was far more advanced than most other ancient societies where, if a man could not pay his debt he, and his family, could be sold as debt slaves. Even by the middle ages, Europe had hardly advanced from this barbaric mind-set. For instance, in Henry the Eighth’s England, a bankrupt individual was considered a criminal and, as such, subject to criminal punishment ranging from incarceration in debtors’ prison all the way to the extreme sentence of death. But, by the Eighteenth Century, England’s law became more enlightened with the introduction of statute 4 Anne ch. 17. This statute provided that un-payable debts would be discharged in order to reward those debtors that agreed to pay what they could on their debts.
In the United States, the Constitution provides the power for Congress to enact uniform laws on the subject of bankruptcy. However, permanent federal bankruptcy laws did not go into effect until 1898. Until then, each state had the ability to enact its own laws. The Bankruptcy Act of 1898 remained in force for 80 years until the passage of the modern Bankruptcy Code in 1978. This code created a chapter 11 bankruptcy with a debtor-in-possession in charge of its own affairs, unless a trustee is appointed for cause. Further, the 1978 Act strengthened chapter 13 protections as well as the protections for consumers generally.

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