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Where bankruptcy began

Critics of bankruptcy often give the impression it is a new invention. While there have been important changes to bankruptcy laws in recent years, there is nothing new about people and families suffering under the burden of extreme debt.

The word "bankrupt" is taken from the Italian word bancarupta, which means "bench broken" or "bank broken." It is believed this term alludes to the custom in the Medieval Ages of breaking a merchant's marketplace table upon failure to pay a debt. While the concept of "acts of bankruptcy" was developed in medieval Italy in response to insolvent traders, the concept of debt repayment is as old as civilization itself.

The Code of Hammurabi, written by King Hammurabi who ruled Babylon between 1792-1750 BC, contained one of the earliest attempts to set rules for settling debts.

Ancient Greece followed similar methods of debt repayment. However, by the 7th Century BC, the wealthy in and around Athens held so many of the poor in bondage that economic collapse and rebellion appeared likely. To avert potential disaster, the lawmaker Solon granted amnesty to many of those in bondage and outlawed contracts, which used a person's liberty as collateral for the debt.

Julius Caesar scaled down debts, enacted severe laws against excessive interest rates, and relieved extreme cases of insolvency by establishing the laws of bankruptcy essentially as it stands today.  45 BC  - The Story of Civilization, Caesar and Christ by Will Durant

Rome, in the 5th Century BC, studied Solon's reforms when it decided to codify its laws into the Law of the Twelve Tables. By the time Augustus ruled Rome (31 BC - 14 AD), a debtor could choose to give his property to his creditors, called a cessio bonorum, to avoid being seized himself. Due to worries about debtors who hid or squandered their property, by 379 AD, this method was only available to debtors whose insolvency was deemed to have been caused by an act of God.

Bankruptcy in modern-day Canada

From 1958 to 1971 in Canada, the consumer bankruptcy rate was at a fairly constant level, and, for a modern industrialized country, the rate was actually very low. For example, in 1968, Canada had 6 bankruptcies per 100,000 population, whereas the United States had 90.

However, many low-income people and families from coast to coast were trapped in impossible debt situations with no relief available. In 1972, in response to recommendations from a special joint committee of the Senate and House of Commons on consumer credit and a special Senate committee on poverty, the Federal Government started the Poor Debtors' Assistance Program. As a result, in the period from 1972 to 1981, the bankruptcy rate rose steeply.

In 1982 the severe worldwide recession caused the consumer bankruptcy rate to jump dramatically from 23,000 in 1981 to more than 30,000 - an increase of 33 percent over the previous year. From 1983 to 1985, the bankruptcy rate in Canada fell in response to the strengthening economy. Since 1985, the consumer bankruptcy rate has risen steeply, hitting record numbers in 1997 and then declining slightly in 1998.  The highest number of personal insolvencies (bankruptcies and proposals) ever recorded was more than 115,000 in 2009.

Why Canada needs bankruptcy laws

The bankruptcy laws in Canada have a positive effect on the average Canadian taxpayer. Bankruptcy law helps promote enterprise in Canada by encouraging entrepreneurship. Bankruptcy law also acts as a social safety net for individuals which provides them a fresh financial start and integrates them back into mainstream society as tax paying citizens.

Encouraging Enterprise:
A research study by Wei Fan and Michelle White published in the Journal of Law & Economics, vol. 46:2, October 2003 found that locations with more lenient bankruptcy rules have higher levels of self-employed individuals, meaning that these regimes encourage enterprise. America’s liberal business bankruptcy laws are repeatedly cited as a factor in the US’ prodigious advantage over Europe in entrepreneurship.

The Wei Fan and Michelle White study concluded that families who are homeowners are about 35 percent more likely to own businesses if they live in states with high or unlimited rather than low homestead exemptions, and the difference is statistically significant. Renters are 29 percent more likely to own businesses if they live in high-exemption states, and this difference is also statistically significant.

Another significant factor in encouraging entrepreneurship is the fact that the business person who has a business that fails knows that he is entitled to a fresh financial start.

Social Safety Net for Individuals:
During the last 30 years, consumer debt has grown tremendously thanks to the increasing availability of credit cards and opportunities for debtors to take out second mortgages on their homes. Debt is not bad in and of itself. In fact, consumer debt has been one of the great dynamic factors in our economy. A high level of domestic consumption is required for both stability and growth in Canada.

However, society has recognized that it has a responsibility to those people who are unable to find solutions for debt repayment. Imagine if there was no debt relief. What would people hopelessly burdened with debt do? They would, without doubt, become part of the “underground” economy. They would not pay taxes. They could not accumulate assets and would be outcasts from society. This would not be good for them, their families, or society.

The Canadian government has recognized this and Canada’s bankruptcy laws have the following objectives:

• In the case of an individual, to permit an honest but unfortunate debtor to obtain a discharge from his or her debts.

• To provide for the orderly and fair distribution of property among the creditors.

• To allow an investigation to be made of the affairs of the bankrupt.