Bankruptcy

Lore & Background

The word bankruptcy derives from Italian banca rotta, literally meaning 'broken bank'. The term is often described as having originated in Renaissance Italy, where there allegedly existed the tradition of smashing a banker's bench if he defaulted on payment. However, the existence of such a ritual is doubted. In Ancient Greece, bankruptcy did not exist. If a man owed and could not pay, he and his wife, children or servants were forced into debt slavery until the creditor recouped losses through their physical labour. Many city-states limited debt slavery to five years, with protection of life and limb. Athens, by the laws of Solon, forbade enslavement for debt. Bankruptcy is also documented in East Asia. According to al-Maqrizi, the Yassa of Genghis Khan contained a provision that mandated the death penalty for anyone who became bankrupt three times.

Reader's Guide

Bankruptcy has evolved from ancient debt slavery to a modern legal mechanism focused on rehabilitation rather than elimination of insolvent entities. The principal focus of modern insolvency legislation and business debt restructuring practices no longer rests on the elimination of insolvent entities, but on remodeling the financial and organizational structure of debtors experiencing financial distress. For private households, debt advice, supervised rehabilitation, financial education, and social help are equally provided during rehabilitation. In most EU member states, debt discharge is conditioned by partial payment obligation and behavioral requirements; the US system is less conditional. In the US, student loan debt is very difficult to discharge, requiring specific grounds under the Brunner test. Bankruptcy fraud, a white-collar crime, involves concealment of assets, false information, or multiple filings, and is distinct from strategic bankruptcy, which is not criminal. In some countries, bankruptcy is limited to individuals; in others, it applies more broadly. In Finland, insolvent individuals may face de facto indentured servitude or minimum social benefits unless granted rare clemency.

Did You Know?

• The word bankruptcy derives from Italian banca rotta, meaning 'broken bank', though the tradition of smashing a banker's bench is doubted.
• In Ancient Greece, debtors and their families could be forced into debt slavery; Athens forbade enslavement for debt under Solon's laws.
• According to al-Maqrizi, the Yassa of Genghis Khan mandated the death penalty for anyone who became bankrupt three times.