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Bankruptcy, Restructuring & Commercial Litigation

Bankruptcy Reform: Let’s Not Forget the Biblical Basis for the Bankruptcy Code

With filings again exceeding one million last year and more expected this year, there is growing controversy about the existing Bankruptcy Code. As the debate over suggested reforms rages on, it might be useful to look back to the reasons for bankruptcy and the sources of many of our bankruptcy provisions.

Many people are surprised to learn that bankruptcy, or at least the concept of discharge, is a commandment of the Old Testament:

“At the end of every seven years thou shalt make a release. And this is the manner of the release: every creditor shall release that which he hath lent unto his neighbor: he shall not exact it of his neighbor and his brother: because the Lord’s release hath been proclaimed.” Deuteronomy, Chapter XV, v.1-2.

Under the old Bankruptcy Act of 1938, the debtor could not file in bankruptcy within seven years of a prior filing. In 1978, Congress shortened the biblical seven year period to six years.

Lenders were forbidden from discriminating against borrowers on the eve of the release year:

“Beware that there be not a base thought in thy heart, saying: The seventh year, the year of release is at hand…, and thine eye be evil against thy needy brother, and though give him nought.” Deuteronomy XV, v.9. Contra, 11 U.S.C. §365(e)(2)(B).

The exemption for tools of the trade (11 U.S.C. §522) was present in Greek and Roman law and early British common law following the biblical injunction:

“No man shall take the mill or the upper millstone to pledge: for he taketh a man’s life to pledge.” Deuteronomy, Chapter XXIV, v.6.

The exemption as to personal clothing also is biblical in origin:

“If though at all take thy neighbor’s garment to pledge, though shalt restore it unto him by that to sun goeth down: for that is his only covering, it is his garment for his skin: where shall be sleep? And it shall come to pass, when he crieth unto Me, That I will hear; for I am gracious.” Exodus Chapter XXII, v.25-26.

Objections to discharge can also find biblical roots:

“Though shall not utter a false report; put not thy hand with the wicked to be an unrighteous witness.” Exodus, Chapter XXIII. v1.

Wages were considered priority obligations to be paid in the same day as the work was done. Deuteronomy XXIV, v.15.

The rules for the administration of justice in a Court of equity were also set forth. Consider the following:

“Though shall not wrest the judgment of thy poor in his cause (Exodus XXIII, v.6)… neither shall thou favour a poor man in his cause.” (Exodus XXIII, v.3).

The prohibition for ex parte contact with the Court can be traced to Exodus XXIII, v.8:

“And though shall take no gift; for a gift blindeth them that have a sight, and preventeth the words of the righteous.”

There are, of course, other examples. But these examples support the viewpoint that bankruptcy is about more than just money. It is embedded in a moral code that offers relief and protection to the impoverished, while at the same time protecting the rights of the lender. In our rush to “do something” about the high volume of bankruptcy filings, particularly consumer cases, we should not lose sight of the original moral justification and purpose of bankruptcy relief.