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The word “bankrupt” comes from Italian banca rotta, which (translated) means “broken bench.” In Italy, money dealers worked from tables, or benches. When a money dealer ran out of money, his table (or bench) would be broken, and he could no longer deal money. Hence, the development of the use of the word banca rotta. The word had its French equivalent, banqueroute, and then made its way into the English language in the mid 1500s. The term was used both as a figure of speech, as well as a literal definition to describe what happened to a few unfortunate folks.

History of Bankruptcy

In ancient Greek civilization, the idea of bankruptcy did not exist. When a man owed another man money that he couldn’t pay, the indebted man (as well as his wife and/or family, if he had one) was put into “debt slavery” until the issue of money had been entirely worked off through physical labor. Many times, such debt slavery lasted for a lifetime; however, debt slaves were protected by the law: their masters could not kill or remove any of their limbs. These same luxuries were not afforded to other types of slaves.

In biblical times, according to the Old Testament or Torah, debts were forgiven every seven years. However, debts of foreigners were only forgiven every seventh seven, or 49th, year. In the Qur’an, it states that a person unable to repay his debts, the debt should be postponed until the person is able to repay. England first introduced a law in 1542 to deal with the issue of bankruptcy. During that time, being bankrupt was considered a crime; therefore, any person experiencing bankruptcy was held to the same types of punishments as other common criminals. Shortly thereafter, Spain became the first self-governing nation to declare bankruptcy. Until the 1900s, bankruptcy laws usually were written in favor of the creditor, and laws punished the bankrupt person severely.

Current use of bankruptcy

More modern laws are not nearly as harsh on the bankrupt person. Instead, they focus less on punishment of the person in debt, and more on rehabilitation of the person or company, so that he/she/it will be able to more effectively manage his/her/its money in the future. In 1934, the US Supreme Court ruled that bankruptcy laws were designed to give the debtor a “fresh start” by eliminating previous financial burdens. The goal was to create a new opportunity in life in which the debtor no longer was inhibited by his/her previous mistakes. This new law showed an extremely different perspective compared to previous bankruptcy laws, which focused more on the recovery of money owed. The Bankruptcy Reform Act of 1978, which took effect the next year in 1979, replaced old bankruptcy laws and is still in effect today. This law made it much simpler for individuals and companies to file bankruptcy and recover from their debt.