Patrick O'Malley

The Reason We Have Bankruptcy, A Short History

“The rich rules over the poor, and the borrower is the slave of the lender.” Proverbs 22:7

“At the end of every seven years you shall grant a release of debts.” Deuteronomy 15:1

For millennia, it has been seen that debt enslavement is inhumane, and as such, it is both socially and morally destructive. Furthermore, the corollary, that debt forgiveness is humane, is both a social and moral good.

The first recorded bankruptcy case was in Babylon, 3000 years ago. In England 300 years ago the first written laws for conducting what resembles a modern bankruptcy trial were promulgated.

The Founding Fathers knew well both recent English history and ancient Bible verses. They knew bankruptcy was vital to a well-functioning economy. So, they reserved this important power for the federal government in the text of the constitution, ahead of the Bill of Rights, no less.

Over the next 100 years, lawmakers passed numerous bankruptcy acts in response to periodic financial crises, only to quickly revoke the acts soon after the crisis passed. Thus, it was in fits and starts that U.S. bankruptcy law eventually took its current form.

Despite its long history, even today, bankruptcy carries stigma in society—because it is incorrectly viewed through a short-sighted lens of personal value judgments and moral hazard. The stigma is misplaced—businesses and individuals normally become insolvent due to financial circumstances that are outside of their control. Furthermore, there is no ‘free lunch’ for honest debtors in bankruptcy. And, dishonest debtors are almost too easy to catch in our digital era. The social stigma and misperception is very unfortunate, economists have proven for centuries that, in macro terms, all parties—civil society, the economy, the parties affected by bankruptcy, including the creditors—benefit from fair laws uniformly applied. Laws that allow all parties to conduct their regular business knowing they will be treated equally, fairly, and consistently. Laws that give a ‘fresh-start’ to individuals and businesses that have no hope of recovering otherwise. Laws that allow businesses to make an orderly exit, freeing the marketplace for the remaining firms to thrive and innovate. Laws that allow the economy and the firms within it to quickly readjust to economic downturns and recover much more quickly than would be possible in the absence of uniform bankruptcy laws.

Bankruptcy law today

The U.S. Bankruptcy Code is designed to very quickly (for a legal proceeding, that is), transparently, and equitably discharge debts and contract obligations so as to allow all parties to get back to their regular business and grow the economy. The code weighs the interests of many constituencies: the debtors, the creditors, the courts, civil society, and the economy. In any bankruptcy, losses will be suffered; it is best they are suffered in accordance with clear and just rules. After 220 years in the making, federal bankruptcy law has found the right balance of micro and macro considerations.

Today, in the era of COVID-19, we can take comfort knowing that bankruptcy was specifically designed for economic crashes to aid in the financial recovery of individuals, businesses, and society.

Contact us for help

Business Bankruptcy Solutions helps Coloradoans lower their debts, renegotiate contracts and save their businesses. Call (720) 674-7311 or email now to schedule a free consultation. We will discuss the problems facing both your business and personal finances and the tools we can use to achieve your goals. We draw upon decades of legal and business experience to provide you with actionable solutions. With BBS on board, we’ll help you weather this storm.