Chapter XII Background: The Evolution of Bankruptcy Law

JurisdictionUnited States

XII. Background: The Evolution of Bankruptcy Law

Bankruptcy law finds its provenance in the late Middle Ages or the early Renaissance as part of the commercial revolution in the Italian city states — not accidentally, about the same time and place as the invention of double-entry bookkeeping. These are both the kind of devices you want to have if you are running a market economy. The word comes from Latin bancus rup-tus, Italian banca rotta and French banqueroute, roughly translated as "broken bench." Folklore says that if a trader fell into insolvency, you destroyed his market stall. Whether anybody ever actually broke a bench in this way is perhaps an open question, but the name seems to stick to a complex of ideas that revolve around the idea of financial distress.

From the original meaning, it is perhaps best to imagine a kind of class action where creditors clubbed together and designated a representative to collect their claims. The discharge did not enter the matter until 1705 in England, when Parliament authorized creditors to grant a discharge as an inducement to cooperation. The reason is simple: The debtor is in the best position to have information about his own financial condition, so the courts need the debtor's cooperation in a bankruptcy case.

American colonies experimented with a variety of devices under the name of "bankruptcy" — sometimes as a kind of punishment, sometimes as a device for debtor relief. The power to make bankruptcy law passed to the nascent federal government via the Con-stitution, specifically Article I, Section 8, Clause 4, which empowers Congress "to establish ... uniform laws on the subject of bankruptcies throughout the United States."

This is a nontrivial point: Once you establish that something is "bankruptcy," you know the federal government has power over it. In fact, there has been very little litigation over the scope of bankruptcy's power — nothing like the history of contention over the commerce clause. On the other hand, an oddity of bankruptcy's power is that nobody seems to know quite what it is doing there: The legislative history is almost a blank slate. You could make a plausible case that the drafters wanted a device to give debtors relief. You could make an equally good case that the drafters saw its power as a matter of market discipline. Indeed, it might very well be that this is one of those instances where one person thought "A" and another thought "B" and they "agreed" without realizing that...

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