Bankruptcy (from Lat. bancus or Fr. banque, table or Definition. counter, and Lat. ruptus, broken), the status of a debtor who has been declared by judicial process to be unable to pay his debts. Although the terms "bankruptcy" and "insolvency" are sometimes used indiscriminately, they have in legal and commercial usage distinct significations. When a person's financial liabilities are greater than his means of meeting them, he is said to be "insolvent"; but he may nevertheless be able to carry on his business affairs by means of credit, paying old debts by incurring new ones, and he may even, if fortunate, regain a position of solvency without his creditors ever being aware of his true condition. And even when his insolvency becomes public and default occurs, a debtor may still avert bankruptcy if he is able to effect a voluntary arrangement with his creditors. A debtor may thus be insolvent without becoming bankrupt, but he cannot be a bankrupt without being insolvent, for bankruptcy is a legal declaration of his insolvency and operates as a statutory system for the administration of his property, which is thereby taken out of his personal control.
In primitive communities bankruptcy systems were unknown. Early methods. Individual creditors were left to pursue their remedies by such means as the law or practice of the community might sanction, and these were generally of a very drastic character. Under the Roman law of the Twelve Tables, the creditors might, as a last resort, cut the debtor's body into pieces, each of them taking his proportionate share; and although Blackstone in quoting this law appears to cast some doubt upon its too literal interpretation, there can be no doubt that the power of selling the debtor and his family into slavery was one which was habitually exercised in Greece, Rome, and generally among the nations of antiquity. Even among the Jews, whose legislation was of a comparatively humane character, this practice is illustrated by the Old Testament story of the woman who sought the help of Elisha, saying, "Thy servant my husband is dead ... and the creditor is come to take unto him my two children to be bondmen." The savage severity of these earlier laws was, however, found to be inconsistent with the development of more humane ideas and the growth of popular rights; and tended, as in the case of Greece and Rome, to create serious disturbance in political relations between the patricians, who generally composed the wealthier or creditor class, and the plebeians, in whose ranks the majority of debtors were to be found.
Later legislation consequently substituted imprisonment in a public prison for the right of selling the person of the debtor. Under the feudal systems of Europe the state generally insisted on its subjects being left free for military service, and debts could not therefore be enforced against the person of the debtor; but as trade began to develop it was found necessary to provide some means of bringing personal pressure to bear upon debtors for the purpose of compelling them to meet their obligations, and under the practice of the English courts of law the right of a creditor to enforce his claims by the imprisonment of his debtor was gradually evolved (although no express legal enactment to that effect appears at any time to have existed), and this practice continued until comparatively recent times.
Without some system of enforcing payment of debts it would Commercial objects. have been impossible for the commerce of the world to have attained its present proportions; for modern commerce is necessarily founded largely on credit, and credit could not have existed without the power of enforcing the fulfilment of financial contracts. On the other hand remedies against a debtor's person, and still more against the persons of his family, are not only inconsistent with the growth of opinion among civilized communities, but are in themselves worse than futile, inasmuch as they strike at the root of all personal effort on the part of a debtor to retrieve his position and render a return to solvency impossible. Hence the necessity of devising some system which is just to creditors while not unduly harsh upon debtors, which discriminates between involuntary inability to meet obligations and wilful refusal or neglect, and which secures to creditors as between themselves an equitable share of such of the debtor's assets as may be available for the payment of his liabilites. These are the objects which the bankruptcy laws have primarily in view.
Another object, which has not always been so fully recognized as it might appear to deserve, has marked the most recent legislation, namely, the fostering of a higher tone of commercial morality and the protection of the trading community at large from the evils arising through the reckless abuse of credit and the unnatural trade competition thereby engendered. It must be admitted that these objects are of a somewhat conflicting character, and wherever the state has interfered with the view of securing an efficient system of bankruptcy legislation the task has been found to be extremely difficult. Not only have the conflicting interests of the debtor and his creditors to be taken into account, but the method to be adopted in dealing with his property has also given rise to much conflict of opinion, and to a lack of uniformity and consistency in the legislation which dealt with it. The debtor's property was naturally regarded as belonging to the creditors, but it could not be distributed among them until it was realized, and until their respective right and interests were determined by competent authority. In some cases claims to rank as creditors are of doubtful validity.
In others the creditor holds securities, the value of which requires investigation, or he claims a preference to which he may or may not be legally entitled. Creditors have thus conflicting interests as between themselves, and are therefore incapable of acting together as a homogeneous body. Hence the necessity for calling in the aid of professional assignees or trustees, solicitors and other agents, who made it their special business to deal with such matters, exercising both administrative and quasi-judicial functions, in return for the remuneration which they receive out of the property for their services. Professional interests, which are not always identical with the interests of the debtor or the creditors, are thus called into existence, and these interests have from time to time exercised a powerful influence in shaping the course of legislation.
While the law of bankruptcy has therefore been largely the product of commercial development, it has necessarily been of slow and gradual growth, tentative in its character, and subject to oscillation between the extremes of conflicting interests according to the temporary and varying predominance of each of these interests from time to time. No intelligible grasp of the principles which underlie the history of bankruptcy legislation in England, and no satisfactory explanation of the fluctuating tendencies which have marked its progress, are possible without bearing these considerations in view.