What does “bankrupt” mean?

The word “bankrupt” comes from the Italian banca rotta, meaning “broken bench.” In Italy, money dealers worked from benches or tables. If a money dealer ran out of money, his bench or table was broken in half and he was out of business. The word had its French equivalent, banqueroute, and subsequently made its way into the English language as both a figure of speech and a literal definition of what happened to the affected person.

In ancient Greek civilization, the idea of bankruptcy did not exist. If one person owed money to another and lacked sufficient means to pay, the indebted man, his wife, and family (if he had one) were put into “debt slavery” until the debt had been worked off. Often, such debt slavery could last a lifetime.

Religious Roots

In biblical times, according to the Old Testament (or Torah), debts were forgiven every seven years. As soon as the Jews settled in Israel, they began to count seven-year cycles. Every cycle would culminate in a Sabbatical year known as Shemittah, literally: “to release.” At the conclusion of seven Shemittah cycles, the 50^th year is referred to as Yovel: the Jubilee. The observance of Shemittah had several dimensions. For example, during the Shemittah year, the residents of Israel were prohibited from cultivating their fields and certain types of slaves were offered their freedom. Simply put, the Shemittah year prohibited a lender from collecting on outstanding debts owed by his fellow citizens.

The Jubilee is akin to a “Super-Shemittah.” In the Jubilee year, all debts were canceled, including those owed by non-citizens. Further, in the Jubilee year, all slaves were set free, even those who elected to stay through a prior Shemittah period. Finally, all land in Israel was returned to its original owner. As a result of this provision, the land of Israel (provided certain conditions exist) could not be sold outright. Rather it was rented for a period of years, with the term and price determined by the years remaining until the next Jubilee.

U.S. Bankruptcy Laws

Several concepts, including reaffirmation of debt, the difference between personal and commercial indebtedness, and a lender’s right to retain collateral appear first in the rules of Shemittah and Yovel, and have since been incorporated into the bankruptcy laws of the U.S., including the Bankruptcy Code (the code), which was adopted in 1978.   

In general, the code made it easier for both businesses and individuals to file bankruptcy and reorganize. The code was a major piece of legislation that started a number of legal controversies, and many amendments and judicial clarifications of the code were affected in the first several years after its adoption. One key event was the 1982 Supreme Court Marathon Pipeline ruling that the Bankruptcy Court’s enlarged jurisdiction, which had been established by the 1978 Act, was unconstitutional; this decision led to amendments of the Code in 1984. Other changes in 1984 limited the right of companies to terminate labor contracts. Most recently, in response to COVID-19, Congress increased the debt limits for eligibility under the new subchapter V that streamlined the process for smaller companies.

Is a Jubilee the answer?

The advent of COVID-19 and the related economic turbulence may lead some to wonder whether a debt Jubilee would be the answer to our woes – a providential gift. From a strictly economic perspective, the answer is likely to be no. Arguably, however, targeted debt forgiveness, or at least a more lenient and well-structured bankruptcy system with a larger debt forgiveness component, may be appropriate in particularly acute cases.

For further information, please contact any member of Taft’s Distressed Companies Task Force.

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