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Bankruptcy

Debtor's Prison

The word “bankruptcy” is believed to originate from the Italian term banca rotta meaning broken bench. This term likely referred to the marketplace benches where pre-renaissance merchants conducted business. If a merchant was unable to pay his debts, his goods were ceased and his trade bench was broken up so he could no longer trade. Sadly, the merchant and his family were often broken up as well.

Prior to the Bankruptcy Act of 1898, the inability to repay debts was a crime. People who were unable to repay their debts were required to surrender all of their assets and be incarcerated until their debts were paid in full. To ensure debtors disclosed all of their assets, early Virginia legislation allowed creditors to torture debtors to gain full asset disclosure and English law allowed the hanging debtors who hid assets.
 
The Bankruptcy Act of 1898 and the subsequent revisions, including the current Bankruptcy Code, recognized the irony of incarcerating debtors until they could repay their debts. These current laws limit the use of criminal sanctions to cases where the debtors are truly attempting to defraud creditors. In all other cases, debtors keep statutorily exempt assets for the support of themselves and their families, pay off the debts they are able to, and are release from further financial obligations.

 

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