The History of Bankruptcy: Dungeons, Slavery and Executions
Today's bankruptcy laws tend to favor the debtor. But historically, the creditor was in the driver's seat, and if you went broke, you ended up a slave or worse. Image
Credit: stockxpert

This week's collapse of General Motors is just another in a sad line-up of businesses that have failed during the recent economic downturn. But the core concept of bankruptcy — debt relief — is rooted in ancient history, garnering a few mentions in the Bible, even.

Some key differences separate the debt collection of old with the modern laws.

The head of GM won't be executed, for example, like he could have been in some parts of ancient Rome. Nor will he be thrown in a debtor's dungeon, as was popular in Dark Age England.

Originally used as a means to get creditors back what they were owed, bankruptcy laws have evolved over thousands of years to now protect the debtor, too.

The old ways

As long as there has been money, there have been people in way over their heads.

Even the Old and New Testaments counsel lenders on how to deal with those who owe them money, urging the forgiveness — naturally — of a neighbor's debt every seven years.

The term bankruptcy comes from the Latin words for "broken bench" — ruptus and bancus. In ancient Rome, business was often conducted and money exchanged from a simple bench in a marketplace, much like a modern merchant's counter. If a merchant got into trouble with his creditors, they had the right to literally smash his bench, or alternatively carry it off, to signal the merchant's financial distress and stop him from continuing to conduct business.

There is also some historical evidence for the execution of Romans who owed money, but debtors were more often forced into slavery for their creditors, as was the custom in parts of ancient Greece.

Medieval bankruptcy laws were only slightly less barbaric. Henry VIII of England, in between lopping off the heads of his wives, passed a law in 1542 that repealed his predecessors' penchant for mutilating offenders and instead sent them off to special debtor's prisons, which soon filled to capacity.

Henry's daughter Elizabeth I followed suit in 1570 with comprehensive bankruptcy legislation that would form the basis for the early American laws.

Designed not to relieve a person from debt but rather to protect the lender from losing all that was owed to them, most of Elizabeth's provisions seem foreign today, most glaringly the fact that bankruptcy proceedings were always begun by the creditor. Trustees appointed by the bank also had the right to break into the offender's home and seize all of his possessions, which were sold in order to pay back as much of the money owed as possible.

A uniquely American idea

Prior to U.S. Independence and in the first few decades of the new nation there was no common rule for the treatment of those in debt, so individual states made their own decisions and had different laws.

Most states followed the general practice carried over from England and threw into jail individuals who defaulted on their loans. Many prominent Americans served time for the offense, and Declaration of Independence signatory Robert Morris was among them.

Ideas began to shift in the 1800s, however, when the uniquely American practice of debtor's "relief" was born.

With sweeping bankruptcy legislation becoming especially important in the financially devastating years following the Civil War, laws increasingly favored the debtor — the "honest" man that just happened to find himself in economic misfortune, like so many around him. Unlike any other legislation in the world at the time, the Bankruptcy Acts of 1867 and 1898 allowed Americans to both initiate bankruptcy themselves and wipe out their debts completely.

Despite several major overhauls, most recently in 2005, it is this theme of debtor's relief that now guides U.S. bankruptcy filings, whether personal or corporate, such as the one recently filed by General Motors.

Bankruptcy filings are reaching new record highs year after year, experts say, with 2009 set to break the previous year's mark very easily.

Heather Whipps is a freelance writer with an anthropology degree from McGill University in Montreal, Canada. Her History Today column appears regularly on LiveScience.