Moses' Holy Jubilee Sets Stage for Bankruptcy

Debtor Relief Kinder in US After Harsh Beginnings in Old World

Jun 3, 2009

The concept of bankruptcy is as ancient as the Old Testament.

An early version appeared around 1400 B.C., when Moses called for a "Jubilee" or Holy Year once every 50 years, during which all the debts of persons would be canceled; lands that had been sold returned to the original owners; and Israelites who had sold themselves into slavery, given their freedom.

First English Bankruptcy Laws Made Debtor a Criminal

The Greeks were less charitable, two hundred years later. When a debtor owed an obligation he could not pay, his family, including servants, became debt slaves. Some regions did protect such slaves from bodily harm and, in addition, limited the slavery to five years, at least for family members.

In England in 1542, when Henry VIII was on the throne, the first official laws of bankruptcy were passed. Not necessarily good news, however, for those down on their luck. They made an insolvent individual a criminal. Punishment might be incarceration in a debtors' prison or execution, in extreme cases.

Laws Now Allow Either Debtor or Creditor to Instigate Legal Proceedings

The concept of bankruptcy is apocryphal; as such, it has changed dramatically since the proclamation by Moses from the Bible passage in Leviticus 25: 10-13. Now the debtor can instigate the legal proceedings—called voluntary bankruptcy—or creditors can instigate them—called involuntary bankruptcy.

In the case of an individual, modern bankruptcy provides the debtor with relief from an irreversible condition of debt, in an overall plan that strives to satisfy claims through liquidation of the debtor’s non-exempt assets, while restoring financial freedom.

For a business enterprise, the court now attempts to shift the financial satisfaction of creditors to future earnings of the debtor, rather than through liquidation of company assets. A plan is presented that reorganizes the enterprise into a viable business, to accomplish the ends desired.

Bankruptcy Act of 1898 Allowed Business Enterprises Relief from Creditors

Congress passed the first bankruptcy law in 1800, which it repealed three years later. Like ensuing laws of that century, the first law was in response to personal losses arising from an extraordinary economic event—specifically, excessive land speculation. The Panic of 1837 instigated another law in 1841, repealed in 1843.

The Bankruptcy Act of 1898 became the first to give companies the option of being protected from creditors. To accomplish this, the company could be placed in an "equity receivership," a status made much more formal and extensive in the US during the 1930s.

New Age of Bankruptcy Has Popularized Filing by Debtors

As the modern attitude toward bankruptcy evolved by fits and starts in the 20th century, the theme became one of financially rehabilitating an insolvent entity, with a modicum of punishment for the debtor’s predicament. BankruptcyData.com sums up modern thinking this way: “In a 1934 U.S. Supreme Court decision, the Court reveals that the primary goal of bankruptcy laws was to offer debtors a ‘fresh start’ from financial burdens.”

As a more enlightened attitude continued in America, a rash of mammoth filings during the early 1980s and 1990s necessitated additional help for the courts, in the form of expansions in the laws. One tool that achieved this was “pre-packaged” filings, mainly for corporate types. As recently as 2007, abuses in fees and similar matters were addressed in legislation.

International Credit Insurer Forecasts 50% Surge in US Filings

Paris-based Euler Hermes, the world’s largest credit insurer, estimates in 2009 there will be a 50% increase in business filings in the US. That expected surge compares with a 45% rise in 2008 and 44% in 2007.

For 2009 worldwide, Euler Hermes forecasts a 25% rise in business filings, with the 50% surge in the US second on the list. Hong Kong is first, up 103%, followed by the Netherlands up 38%, the UK up 34 percent and Brazil up 25%.

Bankruptcy Connection with GDP Suggests Long Recession Will Keep Courts Busy

Already in 2009, BankruptcyData.com reports some huge filers. The 20 largest—including GM, Chrysler, Thornburg Mortgage, General Growth Properties, Inc., Lyondell Chemical Company, Bank United Financial Corporation, Charter Communications, Inc., R.H. Donnelly Corporation, Abitibi Bowater Inc., and Nortel Networks, Inc.—have placed assets of $320.3 billion, under a court’s jurisdiction.

Economists at Euler Hermes have established an inverse relationship between GDP and bankruptcies. That means as GDP goes up, bankruptcies decline and vice versa. This correlation indicates the 4.5 percent historical compound growth rate of US filings is likely to rise, if the US recession worsens or lengthens.

The copyright of the article Moses' Holy Jubilee Sets Stage for Bankruptcy in Business Financial Planning is owned by Howard Bryan Bonham. Permission to republish Moses' Holy Jubilee Sets Stage for Bankruptcy in print or online must be granted by the author in writing.