The word "bankruptcy" has a technical meaning to indicate that, under the authority of some statute, a judicial proceeding has been instituted for the collection of a debtor's assets, their distribution among his creditors, and his discharge from personal liability to such creditors notwithstanding the insufficiency of his assets to satisfy their claims in full. A party who is subject to such proceedings is called a bankrupt.
(1) Meaning of word "bankruptcy" as now used.
In the present significance of the word bankruptcy, there is connoted:
(a) A statutory law under which a debtor's assets may be collected for the benefit of his creditors, and the debtor discharged from his indebtedness;
(b) A court proceeding for that purpose begun under the law.
(2) Derivation of term "bankruptcy."
The term bankruptcy probably comes from the Italian words banco, rotta meaning broken bench. The Century dictionary says: "It is said to have been the custom in Italy to break the bench, or counter, of a money changer upon his failure; but the allusion is probably figurative like break, crash, smash, similarly used in English."1
(3) "Bankruptcy" and "insolvency" distinguished.
Insolvency signifies a financial condition; inability to pay one's debts; bankruptcy signifies court procedure. Insolvency may not induce bankruptcy, but bankruptcy is usually and in most (but not all) cases predicated upon insolvency.2
(4) "Insolvency" laws distinguished from "bankruptcy" laws.
The term insolvency law as used in its larger sense would include any law meant for the relief of an insolvent debtor or his creditors, including a bankruptcy law, but in a narrower sense is sometimes used to indicate laws which do not give a bankrupt discharge from his indebtedness except with consent of his creditors or a percentage of them.3 State laws relating to insolvent persons are usually called Insolvent Laws. The power of the state to enact such laws, and the effect upon them of federal legislation is considered hereafter.
The earliest known bankruptcy law was a Roman Law in the time of Julius Caesar.
1. Century Dictionary title, "Bankruptcy"
2. For definition of Insolvency under present law, see SEC. 36 of this text.
3. Sturges v. Crowinshield, 4 Wheat (U. S.) 122.
Bankruptcy laws are in force in most countries and have been in force in England since 1542.
In ancient times, the laws against insolvent debtors were severe. It is said that under the Roman law, the creditors could put their debtor to death or subject him to bodily torture. In Julius Caesar's time a law (Cessio Bonarum) was passed providing that a debtor could escape punishment by surrendering all of his goods for the benefit of his creditors. It was not a true bankruptcy law, as used in the modern sense. It could not be invoked by creditors.
Bankruptcy laws upon the continent in later times we need not stop to consider. In England, the first bankruptcy law was enacted in 1542, being Statute 34 Henry VIII. Under this act a debtor was still looked upon as in a sense an offender, and the law was mainly for the benefit of creditors, providing for an equal distribution of the debtor's assets among his creditors, but not releasing the debtor from his debts.
The preamble of that law indicates that the justification for it in the minds of the members of the Parliament was that of an offense committed in becoming an insolvent debtor, no distinction being taken between those who are unfortunate and those who are dishonest. This law was followed by two other bankruptcy acts until the time of Queen Anne when in 1705 (4th Anne, ch. 17) a bankrupt law was passed providing for the discharge of the debtor from his debts in case he fully surrendered his property for the benefit of creditors. Since this time, the twofold idea of the benefit of the creditor and the benefit of an honest debtor has been prevalent both in English and American Bankruptcy acts.
The federal government has express constitutional power to enact bankruptcy laws; the states have also such power in less extensive sense so long as the federal government does not legislate upon the subject, but upon the enactment of the federal law, the state legislation for practically all purposes becomes suspended.
Is this power, thus expressly given, exclusive? It is well settled that if there is no federal law in force, each state may pass insolvency and bankruptcy laws. But upon the going into effect of a federal law, the state law is suspended, in so far as it covers the same ground. It is not abrogated or repealed by the federal act, but merely suspended to come again into force upon the repeal of federal law.5
The power of the state to enact bankruptcy laws is qualified in a twofold way. First: it cannot pass such a law to affect the credits of a citizen of any other state, unless such citizen voluntarily submits to jurisdiction;6 and, second: it cannot enact a law whereby debts may be discharged which take their inception prior to the enactment.7
4. U. S. Const. Art. I, SEC. 8.
5. Sturges v. Crowinshield, 4 Wheat. (U. S.) 122; Ogden v. Saunders, 12 Wheat. (U. S.) 213; Harbaugh v. Costello, 184 111. 110; Stellwagen v. Clum, 245 U. S. 605.
6. Suydam v. Boyd, 14 Pet. (U. S.) 67; Ogden v. Saunders, supra; McMillan v. McNeal, 4 Wheat. (U. S.) 209.
7. Sturges v. Crowinshield, supra.
The second qualification follows from the provision of the constitution that no state shall pass any law impairing the obligation of contract.8 Manifestly a law providing that a debt arising out of an already existing contract should be discharged without the consent of the creditor, would be an impairment of a contractual obligation.9 But a contract entered into after the enactment of a state bankruptcy law, is made with the knowledge of the possibility of that law being appealed to, and may therefore very properly be said to be subject to that law.10 But in the case of the federal government, the constitutional inhibition does not apply; it relates in terms to action by the state. The federal Act need not, and in fact does not save from its operation already existing indebtedness.