One of the best things about this country’s bankruptcy law is that it is inherently optimistic. It embodies a belief that people and businesses deserve a chance to start over without the shackles of debt holding them back, and it encourages financial risk taking by acting as a safety net. Viewed in the abstract, there is something about this that is just so quintessentially American. You might say bankruptcy is as American as apple pie.
What’s funny about saying bankruptcy is as American as apple pie is that neither apple pie nor bankruptcy were invented in the United States. Both were imported, perfected, and popularized here, however.
The roots of bankruptcy law go all the way back to Biblical times. In Chapter 15 of the book of Deuteronomy, it says:
“At the end of every seven years you must cancel debts. This is how it is to be done: Every creditor shall cancel any loan they have made to a fellow Israelite. They shall not require payment from anyone among their own people, because the Lord’s time for canceling debts has been proclaimed. You may require payment from a foreigner, but you must cancel any debt your fellow Israelite owes you.”
This sounds similar to today’s Chapter 7 bankruptcies, which forgive most debts. Even the period between debt cancelation years echoes the current requirement that filers wait a certain number of years before filing for bankruptcy again.
Ancient Rome had laws that allowed creditors to seize the property of debtors who were unable or unwilling to pay, and allowed debtors to volunteer themselves as indentured servants to pay off debts. It is not too much of a stretch to see echoes of this system in our Chapter 13 bankruptcy law, which allows debtors to consolidate their debts and work on paying them off over a period of time.
In other parts of the world, and in different time periods, debtors’ prisons were common. Debtors were arrested and held in these facilities until they could pay off their debts. As you can imagine, this was counterproductive since someone who is in prison cannot earn a living that will allow them to pay off debts.
What we think of as modern-day bankruptcy law was imported from England, like most of our laws were. Article 1, Section 8, Clause 4 of the U.S. Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies throughout the United States.” They did so almost immediately, and have continued to tinker with the law from time to time.
As the arch if history suggests, bankruptcy law is not frozen in time. It continues to undergo changes. Our bankruptcy laws have been amended over time to adapt to new circumstances and the changing economy. Today, the world looks to America as an example of what a successful, cutting-edge bankruptcy system should look like. When we change our law, other countries around the world often do so as well.