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The word “bankruptcy” derives its roots from Italian. It was the practice of creditors in medieval Italy to destroy a trading bench of a debtor who did not pay his debts. The Italian word for broken bench is “banca rotta;” hence the term bankruptcy.
Prior to the 20th century, rules regarding creditors/debtors generally favored creditors and were very harsh toward the bankrupt person. The focus was on recovering the investments of the creditors, and almost all bankruptcies at this time were involuntary. In England, the first official laws concerning bankruptcy were passed in 1542, under Henry VIII. A bankrupt individual was considered a criminal and was subject to criminal punishment. Potential punishments ranged from incarceration in debtors prison to the death penalty.
In the United States, early federal bankruptcy laws were temporary responses to bad economic conditions. The first official bankruptcy law was enacted in 1800 in response to land speculation. All early bankruptcy laws in the U.S. contained some allowance for discharge of unpaid debts. An 1867 law was the first to include bankruptcy protection for corporations.
Modern bankruptcy laws emphasize rehabilitating (reorganizing) debtors in distress. The economic upheaval of the Great Depression yielded much bankruptcy legislation, in particular, the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934. This legislation culminated with the Chandler Act of 1938. This included substantial provisions for reorganization of businesses.
During the period from World War II through the 1970s, bankruptcy was not a major topic in the news. With the exception of railroads, there were few notable business failures in the U.S.
The Bankruptcy Reform Act of 1978 substantially revamped bankruptcy practices. A strong business reorganization Chapter was created, Chapter 11. (This replaced the old Chapters X, XI and XII that had been created in the late nineteenth century and were amended by the Chandler Act.) Similarly, a more powerful personal bankruptcy, Chapter 13, replaced the old Chapter XIII. In general, the Reform Act of 1978 made it easier for both businesses and individuals to file for bankruptcy and to reorganize.
In modern times, the option to liquidate all of one’s assets and have a fresh start has been available to almost everybody in the form of Chapter 7 protection. The law that went into effect
The revised bankruptcy law makes it tougher to file for commercial bankruptcy as well. It gives less time for companies seeking debt protection to decide whether to assume or reject leases. Companies who seek bankruptcy protection will have less discretion in deciding whether to propose reorganization plans and will be required to have more cash available to pay utilities and suppliers in order to keep operating.
One of the most powerful aspects of current bankruptcy law is called the “automatic stay.” This term refers to rules that immediately halt almost all collection actions and lawsuits (such as mortgage foreclosures) against someone who files for bankruptcy protection. The new law restricts the use of the automatic stay in most circumstances. Among other things, the automatic stay will no longer stop or postpone: evictions; actions to withhold suspend or restrict a driver’s license; actions to withhold, suspend, or restrict a professional or occupational license; lawsuits to establish paternity, child custody, or child support; divorce proceedings; or lawsuits related to domestic violence.
The ramifications of the new bankruptcy law have yet to be fully understood. What is known is that a record number of bankruptcies have been filed just prior to the