A Brief History of Bankruptcy and Forgiveness of Debts

The word “bankruptcy” traces its root back to Italian phrase “banca ratta”, which means “broken bench or table”.  Customarily, in medieval times, when a Italian businessman failed to pay the debts, his creditors would break the table or bench from which he conducted his business.

The forgiveness of debts, however, has biblical roots.  Deuteronomy 15:1-2 states:

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.

Of course in the New Testament, forgiveness of debts is a main theme in Jesus’s teaching, as He said in the Lord’s prayer (Mathew 6:9-13):

“Our Father in heaven, … And forgive us our debts, as we also have forgiven our debtors…”

In practice, creditors throughout history have not exactly followed Jesus’s teaching. Aided by the laws enacted by various forms of the governments, they have done quite the opposite.

For instance, the early Romans hacked up and divided the bodies of people who didn’t pay their debts. In early England, they toss the people who could not pay their debts into dungeons.  In China, for thousands of years, people routinely sold their sons or daughters into slavery in exchange of forgiveness of debt.

Eventually, creditors realized that killing, maiming, or imprisoning debtors only ensure that they would never be getting their money back and the debtors would never be productive members of the society — definitely a lose-lose  situation. So in 1542, the initial bankruptcy law was passed under the reign of Henry VIII. The law still viewed the debtors as criminals but provided remedies other than imprisonment and mutilation.

Then in 1570, the good queen Elizabeth I passed a more comprehensive law. No, the law was not meant to protect the debtors, but rather designed to help the creditors. It applied only to merchants, as ordinary debtors still were sent to jails. The law stipulated procedures for a bankruptcy commissioner to seize the debtor’s assets,  sell them and divide the proceeds among creditors.

Bankruptcy law that allowed forgiveness of debts was an unimaginable concept until 1705, when the British Parliament enacted the first law that enabled a person to wipe out unpaid debts.  Make no mistake, the terms of the law were tough: consent of the creditor was required, and anyone who sought bankruptcy relief fraudulently faces death penalty.

In many ways, bankruptcy and forgiveness of debts is one of them. As many problems as we are facing today, you have to agree with me that it is fortunate for us all to be born and live our lives in modern times.

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  • hard money lenders california

    Everybody can understand the difficulties associated with the person who is unable to clear his debts. From the historical time to the present days, it has been tried to make ideas of how to benefit the debtors and creditor. Although lot has been changed over the years. One thing that still has no change is that, if you are in debt, then declare yourself bankrupt.

  • http://miklinseo.com Alexander Miklin

    Great article, Eric! Could you tell me a good site to go to find a bankruptcy lawyer? Thanks for all the great information!

  • http://mannacapitalmanagement.com/ financial advisor virginia beach va

    Thank you Eric for providing nice thoughts about bankruptcy and forgiveness of debts. Can you please explain, by forgiving any debts Will it affect the organization those are providing loans to them.

  • Eric Carnegie

    The burden of finding the client credit worthy lies with the lender. The lenders are usually adequately compensated even with occurrences of bankruptcies. If every loan that has been made has been paid in full. the interest rate should be a lot lower.