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An Ear for your Debt

By Gary D. Hammond (reprinted with permission)

The term “bankruptcy” comes from two sources. One source is the Italian phrase “banca rotta,” meaning “broken bench.” In medi- eval Italy, when a merchant did not pay his debts, the merchant’s creditors would break his trading bench, oftentimes over his head. The other source is the French word “banqueroute.” Banqueroute signified debtors being on the “route” or the lam, a fugitive from creditors, often living well off their ill-gotten gains.

Modern bankruptcy law is directly traceable to ancient Roman law. Creditors were allowed to attach a debtor’s person and property un- der these laws. In fact, creditors could sell the debtor and his family into slavery to satisfy debts because the law considered the debtor’s body as part of the bankrupt’s estate.

Modified Roman bankruptcy law was utilized in medieval France and Italy, and was first adopted by England in 1542. These bankruptcy laws were not intended to give relief to debtors, but to give creditors remedies (other than im- prisonment) against debtors who did not pay their bills. A bankrupt individual was also subject to criminal punishment ranging from debtors’ prison to the death penalty.

Over the next 100 years, Parliament’s few changes to the bankruptcy laws sought primarily to increase the bank- rupt’s assets that creditors could seize and to increase penalties for noncompli- ance. One of the changes in 1604 even permitted the debtor’s ear to be cut off.

In 1705, England introduced the concept of a discharge of debts. The discharge rewarded honest debtors who appeared for court and who revealed property instead of fleeing. A debtor could only receive a discharge if 80 percent of the creditors approved it. Furthermore, early bankruptcy laws were only for “merchants” and could only be initiated by the merchant’s creditors.

In 1785, Colonial Pennsylvania enacted a bankruptcy law borrowed from Eng- lish custom. The law included standing the bankrupt in a public place for two hours with an ear nailed to a pillory before cutting off the ear.