- The term "bankruptcy" derives from the Latin to the Italian, "banca rotte" and the French "banqueroute," literally "broken table" or "broken counter," terms referring to the moneylenders' tables that were turned over or removed when their owners were out of money, or made off with collections. The Old Testament of the Bible provided for forgiveness of all debts every seven years, but other ancient societies enslaved bankrupts to debtors until the debt was repaid. Although Genghis Khan advocated that a debtor who fell into bankruptcy three times be killed, European debtors continued to work off debts as indentured servants until the advent of debtors' prisons during the Industrial Revolution. The state of Georgia was settled by English debtors taking the least unattractive alternative to prison.
- Bankruptcy was invented to break the stalemate between creditor and debtor, not liberate the debtor from responsibility. The legal process as we know it maintains the debtor's ability to support his household and allows the creditor some relief, thus allowing both to continue as productive parties.
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There is no such thing as a do-it-yourself bankruptcy. In American law, bankruptcy is a complex legal process whereby an individual or corporation can discharge debts by voluntarily declaring that he is not able to pay all of his creditors what they are owed. Involuntary bankruptcy occurs when creditors force a debtor to answer for debts. Bankruptcy is covered by Title 11 of the U.S. Code. Individual filers use Chapter 7, which requires liquidation of possessions and property to satisfy debts, and Chapter 11 allows rehabilitation of the debtor by allowing her to totally discharge some debts and pay off others with future earnings. Corporations generally use either Chapter 7 to liquidate or Chapter 13 as a rehabilitative basis for filing. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 imposed a number of new requirements on debtors before petitions can be filed and debts can be discharged. Each federal court district in the United States has a bankruptcy court.
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All types of bankruptcy allow the debtor to keep certain assets that are considered necessary to the debtor's life and livelihood. A discharge of unsecured debts is an obvious benefit, but a bankruptcy petition also forestalls lawsuits by creditors and protects certain assets. Another, unexpected benefit of bankruptcy may be improvement of credit scores due to the disappearance of high-balance credit entries, reduction of the number of open accounts and an improvement of on-time payments on others. Bankruptcy cannot be used in many decisions to grant credit but stays on a credit record for seven years.
- Since the credit-scoring industry has a reputation for inaccuracy, debtors should check credit scores regularly to confirm that discharged balances and old bankruptcies have been removed. Bankruptcy may be considered by companies offering unsecured credit and may have an effect on interest rates that the debtor must pay to borrow money.
