The History of Pre-Medieval Bankruptcy

The word “bankruptcy” as it appears in European languages originates from medieval Italy and the word is Latin in origin, from the words bancus (a bench) and ruptus (broken). A “bank” originally referred to a bench where the first bankers had in public places and markets, on which they tolled their money and wrote bills of exchange. When a banker failed, he broke his bench (or had it broken for him) to advertise to the public that the person to whom the bank belonged was no longer in business. But although this word is just five centuries old, the concept is as old as society, so I decided to look into how ancient societies handled debtors unable to repay creditors.

The Jewish law of debt forgiveness can be found in the Bible at Deuteronomy 15:1–2 which instructs a release of debt every seven years. In the Old Testament of the Bible and Hebrew Scriptures, Moses’ Laws prescribed that one “Holy Year” or “Jubilee Year” should take place every half century, when all debts are eliminated among Jews and all debt-slaves are freed, due to the heavenly command.

In ancient Greece, there was no bankruptcy—if a man owed money he could not pay creditors, his entire family of wife, children and servants were forced into “debt slavery” until the creditor recouped losses through physical labour. Many city-states in ancient Greece limited debt slavery to a period of five years and debt slaves had protection of life and limb (not enjoyed by regular slaves). However, servants of the debtor could be retained beyond that deadline by the creditor and were often forced to serve their new lord for a lifetime, usually under significantly harsher conditions.

Under per-Imperial Roman law, creditors had a fairly persuasive method for dealing with individuals who did not appear to be able to pay their debts when they fell due:

Fasten him in stocks or fetters. He shall fasten him with not less than fifteen pounds of weight or, if he choose, with more. If the prisoner choose, he may furnish his own food. If he does not, the creditor must give him a pound of meal daily; if he choose he may give him more… Three market days later, the creditors were entitled to divide the debtor’s body amongst them… if they cut more or less than each one’s share it shall be no crime.

Roman law later evolved and copied the Greek system noted above (although it was more draconian, and included perpetual foreign slavery for the debtor). As Roman imperial law developed, creditors could petition a local government official (Praetor) for a private right to sell the debtor’s assets. This would eventually develop into the European system of bankruptcy, as the Roman expansion brought this law with them.

In India, I understand that the creditor “may even violate with impunity the chastity of the debtor’s wife. But then, by so doing, the debt is understood to be discharged.” Source here. I have no information on in how bankrtupcy worked in ancient China, but anyone with information is welcome to let us know in the comments.