Bankruptcy History Quiz

1. Where does the term “bankruptcy” come from?

The word bankruptcy comes from "bancus", the tradesman's counter, and "ruptus", broken, denoting one whose place of business was broken or gone. Also acceptable is “banca rota” – Italian version meaning “broken bench”.

2. True or False: The first bankruptcy law was enacted in ancient Rome.

Answer – True. Under pre-English bankruptcy laws, Rome, under the Casears had debt collection laws, a practice of appointing trustees after the market-place bench was either broken or removed as a declaration of a merchant's bankruptcy. The trustee auctioned off the property of the bankrupt to the bidder who would pay the most to creditors. The trustee was appointed by the creditors or by a magistrate if creditors could not agree.

3. Under Roman/Caesarean law, what were the first bankruptcy trustees called?

A. Grabus Takus Maximus
B. Underpaidusoverworkus
C. Curator Bonorum

Answer C. The trustee was called the "curator bonorum" meaning "protector" or"caretaker" of the property which he held for the benefit of the creditors.

4. American bankruptcy law descends from the first English bankruptcy statute enacted in what year?

A. 1570
B. 1066
C. 1805

Answer A. The first English bankruptcy law was passed in England in 1570 during the rein of Henry VIII. It is the foundation of the American bankruptcy laws. While some historians claim a statute passed in 1542 was the first bankruptcy law, it was not. The 1542 statute was designed to prevent frauds on creditors. Under that statute the debtor was summoned to appear before a Chancellor and on the demand of the creditor, to be examined under oath, and if the debtor failed to surrender his possessions to pay his debt, off to debtors' prison he went.

5. Why did Henry VIII enact the bankruptcy statute in 1570?

A. Because Anne Boleyn overspent on his credit cards.
B. Because it was an election year and he was politically beholden to the credit industry who contributed heavily to his re-election campaign.
C. Because the debtors prisons were overflowing.

Answer C. It was necessary since the debtors' prisons were at capacity and this incarceration was creating a national problem in England. Under the English 1705 Statute of Anne bankruptcy act, uncooperative debtors could be executed. It is estimated that five were executed under this law.

6. Under early American bankruptcy law, which of the following was true?

A. Only a creditor could commence a bankruptcy case against the debtor.
B. Citizens were imprisoned for debts and individuals could not file for bankruptcy.
C. Bankruptcy commissioners (trustees) could break into your home and seize assets which could be sold to satisfy the debt.
D. Debtors could have an ear cut off or have an ear nailed, while still attached, to a pillory in a public place.
E. All of the above.

Answer E. During bankruptcy, assets were seized, sold and distributed to creditors but that did not stop the collection of remaining monies owed. There was no discharge of obligation for the remaining debts. Collection efforts continued after the sale of all of the debtor's property. “Bankrupt” was not something that you did but rather something that you were. An act of bankruptcy was a form of conduct that occurred when a debtor was avoiding repaying debts owed.

7. After the original founding of the American republic, what came first: bankruptcy or banks?

Answer: This is a trick question. Although the U.S. Constitution requires Congress to establish a uniform bankruptcy law, it took some time for Congress to enact one. During the first session of Congress, in 1790, there was even a proposal that a general system of Bankruptcy in the United States should be considered. In spite of the agreement for a need for such a process the argument was made that before we develop a process of discharging debts we should first develop a banking system. Good idea. Members were aware that our country's Constitution required a bankruptcy act but there was no rush to enact it.

8. What Article, Section and Clause of the Constitution requires Congress to establish a uniform system of bankruptcy laws?

Article I, Section 8, Clause 4 – Congress shall have the power... to establish an uniform Rule for Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States. America was interested in passing bankruptcy legislation to protect merchants and creditors who otherwise would have little ability to enforce or collect debts. It was understood that bankruptcy fostered the growth of commerce and not the avoidance of debt.

Bankruptcy laws were desired in early America because as was noted during the first session of Congress, England had "…had enjoyed a degree of tranquility and domestic happiness unknown for a century before" under their bankruptcy act.

9. True or False: Under the first American bankruptcy act enacted in 1800, debtors were allowed to claim exemptions.

True. The new law also permitted the debtor to receive a small allowance out of the estate in addition to modest exemptions of property.

10. True or False: Under the first American bankruptcy act enacted in 1800, debtors were entitled to a discharge at the end of their case.

True. However, since the 1800 act allowed for the discharge of obligations by prominent speculators like Robert Morris and since it was believed that the bankruptcy act did little to assist merchants because only small amounts were recovered, the law was repealed in 1803.

11. A new, revised bankruptcy act was enacted in 1841 in response to an economic depression. What was the major difference between this act and the previous act of 1800?

A. Debtors were now required to list their household pets on their Schedule B.
B. Debtors were no longer allowed to receive a discharge of their debts.
C. Debtors could now initiate the bankruptcy instead of creditors.

A federal bankruptcy law was passed again in 1841 following the economic depression of 1837. Relief was desired and Congress finally acted. The 1841 act created the first opportunity for debtors to file bankruptcy instead of being filed against by their creditors. The new law proved to be unsuitable again and was accused of being outside of the intent of the framers of the Constitution. Many debtors received discharges from their debts and creditors received very little. Well, back to the drawing board again. The law was repealed in 1843.

12. After the repeal of the 1837 act in 1843, the next bankruptcy statute to be enacted was in:

A. 1863
B. 1865
C. 1867

It wasn't until 1867 that federal bankruptcy legislation emerged again. Guess what? It was repealed in 1878 because the act was accused of being too unwieldy, too expensive, created long delays, and resulted in little repayment to creditors.

13. The 1938 bankruptcy act to be enacted was the longest standing and most successful in terms of satisfying the interested consensus. What was the most significant feature of the new act?

This act was the first to provide for a partial debt repayment in lieu of liquidation (Chapter XIII)

14. True or False: An attempt was made in 1978 to make Chapter 13 mandatory for consumer debtors before they could obtain a Chapter 7 discharge.

True. Another major overhaul took place in 1978. One feature of the act was the hope that more people would use the Chapter 13 provisions and repay their creditors over a multi-year period. Congress did consider making Chapter 13 mandatory for all filers but later allowed it to be voluntary. In the end Congress simply weakened Chapter 13 protections and made Chapter 7, total discharge of debts, more attractive.

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