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(See also MORAL ASPECT OF BANKRUPTCY.)

Bankruptcy (La banqueroute; earlier English terms, bankruptship, bankrupture) in civil jurisprudence as well as in popular signification is the fact of becoming, or the state of being, a bankrupt. In the statute of 1705, 4 Anne, c. XVII, as printed in the Cambridge edition of the English Statutes, the word is spelled bankrupcy, but the statute of 1711, 10 Anne, c. XV, as printed in the same edition, and in the London edition, adopts the present spelling. Being derived from bankrupt, as insolvency is derived from insolvent, the retaining of the letter t has been suggested to be an instance of erroneous spelling (Murray, Dict., s.v. "Bankruptcy"). Etymologically, bankrupt has been said to be made up of the Latin words bancus, "table", and ruptus, "broken", denoting "the wreck or breakup of a trader's business" (Murray, Dict., loc. cit.), "whose shop or place of trade is broken up or gone" (Wharton, Law Lexicon, s.v. "Bankrupt").

Statutory mention of the word bankrupt seems to be earlier than that of the word bankruptcy, and is first to be found in the title of the English statute of 1542, "against such persons as do make bankrupt", a translation, perhaps, of the French "qui font banque route". (Blackstone, Commentaries, Bk. II, c. xxxi, p. 472, Note e). This statute recites that some "persons craftily obtaining into their hands great substance of other men's goods" either flee to parts unknown or keep their houses, not paying "their debts and duties", but consuming "the substance obtained by credit of other men for their own pleasure and delicate living". For distribution rateably of such persons' assets among their creditors this statute provides a summary method which, to quote Blackstone, is "extra judicial" "allowed merely for the benefit of commerce" (II Commentaries, 477). We learn, however, from the recitals of a statute of 1570 that, notwithstanding the law of 1542 "made against bankrupts", "those kind of persons have and do still increase". And therefore a new definition is made of a debtor who "shall be reputed, deemed and taken for a bankrupt", and subjected to an "extra-judicial" method. Such a debtor, it is enacted, must be a native-born subject or denizen who, being a "merchant or other person using or exercising the trade of merchandise", "or seeking his or her trade or living by buying and selling", shall have been guilty of certain specified fraud and concealment. The assets of such a debtor may, pursuant to this statute, be divided rateably among those of the creditors who are native-born subjects. Thus the limitation of meaning suggested by the explanation cited of its Latin etymology was placed upon the word bankrupt, and thereafter a trader only could be adjudged a bankrupt in England. Debtors who were not traders, and whose means were inadequate to payment of their debts in ordinary course of business, were known as insolvents. But statutory definitions of persons to be deemed occupied in trade became very comprehensive. Yet with special regard, apparently, for "noblemen, gentlemen and persons of quality" investing in the "East India Company or Guiney Company" and certain other enterprises, the imputation of being merchants or traders within any "statutes for bankrupts" is, by a statute of 1662, expressly spared to persons putting in money in these stocks. The circumstance of occupation is, under the present English Bankruptcy Act, immaterial. Aliens and denizens had been brought within the law by a statute of the year 1623.

By the law of Scotland bankruptcy is not limited to any particular occupation. But according to Scotch law insolvency, that is, inability to pay debts or fulfil obligations, does not become bankruptcy until, in manner determined by statute, this inability is publicly acknowledged, and is thus, as expressed in the statute, "notour". The purpose of the English Statutes of 1542 and 1570 did not extend beyond distribution of the bankrupt's property among his creditors. Right of recourse against the debtor by ordinary process of law for any remaining indebtedness these statutes expressly preserved. But by the statute of 1705 a bankrupt, duly surrendering all his effects and conforming to the law, might obtain his discharge from liability for debts theretofore contracted. And more modern statutes permit a debtor himself to institute proceedings in bankruptcy. The Scotch law now permits a "notour bankrupt" to apply for what is termed a decree of cessio bonorum, by which he may be discharged from his debts.

The Constitution of the United States (Art. I, § 8) confers upon Congress power to "establish uniform laws on the subject of bankruptcies throughout the United States". Under this provision Congress may disregard any distinction between bankruptcy and insolvency laws of which laws Chief Justice Marshall remarks (Wheaton's Reports, IV, 194) that the line of partition between them is not so distinctly marked as to enable any person to say with positive precision what belongs exclusively to the one and not to the other class of laws. Originally, however, insolvency laws and bankruptcy laws were prompted by opposite motives and were clearly distinguishable. The motive of insolvency laws was the relief of insolvent debtors, by affording them a remedy against imprisonment and, in ancient Rome, other penalties. On the contrary, the motive of bankruptcy laws was, as already seen, the relief of creditors by affording a remedy against dishonest debtors who might possibly not be insolvent, but whose conduct while indebted was deemed to be such as to entitle their creditors to the summary relief which the law "made against bankrupts" afforded. English as well as Roman insolvency laws contemplated the cases of debtors whom ordinary process of law could reach, but the operation of the English statute of 1542 is limited to debtors who "make bankrupt" and against whom such process was ineffectual, and the statute of 1570 is further limited to traders. The court afterwards established, in the reign of George III, for cases of insolvency was "the Court for relief of insolvent debtors"; but bankrupt laws remarks Sir Edward Coke, are to be construed "for the aid, help, and relief of the creditors". And under certain circumstances a solvent debtor may by the United States law be pronounced a bankrupt.

Congress has passed four bankruptcy laws; the Act passed 4 April, 1800, which was repealed by Act of 19 December, 1803; the Act passed 19 August, 1841, repealed by Act of 3 March, 1843; the Act passed 2 March, 1867, and repealed 7 June, 1878, and the Act of 1 July, 1898, yet (1907) in force.

At the time of the adoption of the United States Constitution a suggestion was rejected that the power of Congress concerning bankruptcy should be confined to merchants and traders. Yet by the Act of 1800 only a merchant or other person resident in the United States and "actually using the trade of merchandise by buying and selling in gross, or by retail, or dealing in exchange or as a banker, broker, factor, underwriter, or marine insurer could be adjudged a bankrupt. Voluntary bankruptcy is not mentioned in the Act of 1800, but by the Act of 1841 "all persons" residing in any State, District, or Territory of the United States owing debts not incurred through defalcation as a public officer or in a fiduciary capacity might apply to become voluntary bankrupts. Involuntary bankruptcy was still restricted to merchants and certain other classes of business men. The Act of 1867 provided for both voluntary and involuntary bankruptcy without regard to the debtor's occupation. By the Act of 1898, the several District Courts of the United States, the Supreme Court of the District of Columbia, the District Courts of the several Territories, and the United States Courts in the Indian Territory and the District of Alaska are made courts of bankruptcy. A person is within this Act insolvent whose property (exclusive of property wrongfully conveyed, transferred, concealed, or removed) is at a fair valuation insufficient to pay his debts. Any natural person or unincorporated company or business corporation as defined in the Act, and owing at least one thousand dollars (except certain natural persons specified), may be adjudged an involuntary bankrupt. Proceedings in involuntary bankruptcy are to be instituted by petition filed within four months after an act of bankruptcy. Such an act consists in conveying, transferring, concealing, or removing, or permitting to be concealed or removed, any of the debtor's property with intent to hinder, delay, or defraud his creditors or any of them; or in transferring while insolvent any property with intent to prefer a creditor or creditors; or in suffering or permitting, while insolvent, any creditor to obtain a preference through legal proceedings or in not having such preference vacated or discharged. So a general assignment for benefit of creditors and certain proceedings under Insolvent Laws, or application by an insolvent for a receiver or trustee are acts of bankruptcy. On the other hand, "any qualified person", namely, any person who owes debts provable in bankruptcy (except a corporation) "may file a petition to be adjudged a voluntary bankrupt". The assets of the bankrupt are to be divided among his creditors, and the court of bankruptcy is empowered to grant him a discharge, that is, a "release . . . from all of his debts which are provable in bankruptcy, except such as are excepted by this Act".

The power conferred on Congress by the Constitution does not wholly preclude the several States of the Union from passing bankruptcy laws. A State may enact such laws conclusive as to the rights of its own citizens, provided such laws do not impair the obligation of contracts within the meaning of the Constitution, nor conflict with any existing Act of Congress establishing a uniform system of bankruptcy.

So far we have considered our subject from a legal point of view. From the point of view of the political economist, bankruptcy and insolvency laws are of great importance. For cost of production of goods includes risk of bad debts, and therefore laws lessening this risk decrease the cost of production. John Stuart Mill concludes that most individual insolvencies are the result of misconduct. But the occurrence of many business failures in a community at any period is a warning or symptom of "the politico-economical disease" which economists denominate a commercial crisis, and for this deeper causes are sought than mere individual misconduct. By fortuitous causes which could not have been foreseen the most skilful calculations may fail; demand for particular kinds of goods may lag behind a supply which has become excessive because of mistakes of the "captains of industry" as to extent of future demand. And there results a disarrangement of the relation between production and consumption, a disturbance of equilibrium, so that commercial settlements become impossible and a crisis ensues. Notable crises of modern times were: the crisis of Hamburg in 1799, when 82 failures occurred; the English crisis of 1814, when 240 banks suspended; in the United States the "wild-cat" crisis of 1837, when all the banks closed, the crisis of 1857, when there occurred 7,200 failures, and the crisis of 1873. To economists, conditions of this kind, resulting from the causes just mentioned, have seemed to denote the necessity for the establishment of a new equilibrium. And it has been suggested that the Jewish jubilee was a means to that end, and an ordinance somewhat in the character of an insolvency or bankruptcy law.

A political community may fail, as may an individual, in meeting financial engagements. There may thus occur what has been termed state, or public, bankruptcy. Of this an ancient instance was the action of the Roman Senate in reducing the weight of the As after the first Punic War. And similar instances of governmental dishonesty occurred during the Middle Ages. In later times State bankruptcy has often taken the form of enforced conversion, involving partial repudiation, of the State debt. At the close of the reign of Louis XIV of France, the State was bankrupt, and to the celebrated John Law was vainly entrusted its financial rescue. The government set up by the French Revolution became not only bankrupt itself, but by its contest with Austria drove the latter empire into the bankruptcy of 1811. And the bankruptcy of Austria has even been said to have become permanent. Turkey, Spain, and some Spanish-American republics may be mentioned as States becoming bankrupt through repudiation. The same remark may be made concerning some of the States of the United States.