History of debt relief

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Debt relief, or debt forgiveness, has been practiced in many societies since antiquity. Periodic debt remission was institutionalised in the Ancient Near East and contributed to the stability of its societies. In ancient Greece and Rome the laws were more creditor-friendly and debt cancellation was one of the major demands of the poor, only occasionally implemented by the government. Medieval canon law contained provisions for the annulment of debts owed by borrowers in distress, which influenced modern personal bankruptcy law.

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Ancient Near East

Urukagina's reform text mentions the cancelling of obligations of indentured families as part of his reforms Clay Cone - Louvre Museum - AO3149.jpg
Urukagina's reform text mentions the cancelling of obligations of indentured families as part of his reforms

Debt relief existed in many societies of the Ancient Near East in the form of debt remission, whereby certain debts were declared void and the foreclosed property reverted to the original owners. Debts were often cancelled by a new ruler issuing a clean slate decree after assuming the throne or following a natural or man-made calamity. Usually only personal debt was cancelled, whereas debts incurred by merchants were unaffected. [1]

The periodical debt remissions played a large role in the Ancient Near East. They contributed to the stability of the society. [2] Most of the loans were taken by peasants to enable them to subsist until the next harvest, and often the land was pledged as collateral. If the borrower was unable to repay the loan the land passed to the lender, with the borrower himself becoming a bondsman. [3] The debt remissions checked the power of elites, who would otherwise amass great fortunes of land cultivated by serfs, and ensured that enough free labourers were available to serve in the army and for public work duties. [1]

The earliest known debt cancellation was proclaimed by Enmetena of Lagash c. 2400 BCE. Similar measures were enacted by later Sumerian, Babylonian and Assyrian rulers of Mesopotamia, where they were known as "freedom decrees" ( ama-gi in Sumerian). [4] This same theme was found in an ancient bilingual Hittite-Hurrian text entitled "The Song of Debt Release". [5] In Ancient Egypt interest-bearing debt did not exist for most of its history. When it started spreading in the Late Period, the rulers of Egypt regulated it and a number of debt remissions are known to have occurred during the Ptolemaic era, including the one whose proclamation was inscribed on the Rosetta Stone. [6] [7] Diodorus Siculus provides the following rationale for abolishing the debt bondage by pharaoh Bakenranef: [8]

"For it would be absurd... that a soldier, at the moment perhaps when he was setting forth to fight for his fatherland, should be haled to prison by his creditor for an unpaid loan, and that the greed of private citizens should in this way endanger the safety of all"

Debt forgiveness is mentioned in the Torah, in which God commanded the Israelites to forgive debts in certain cases at the end of Shmita, the last year of the seven-year agricultural cycle. Hebrew slaves were also set free either at the same time or at the end of the 49-year cycle, depending on interpretation. At the end of the longer cycle, during Jubilee year the land also reverted to its original owners. According to Michael Hudson, the Jubilee law likely appeared in response to a debt crisis and took debt cancellation from the hands of the rulers, making it periodical and automatic. [9] No contracts survive attesting to the compliance, or lack of it, with the Jubilee law. [10]

Due to the First Exile, the laws of debt remission were no longer applicable, as most Jews were not living in the land of Israel, and the fact that the remission was tied to the restitution of ancestral land. Later Rabbis would decree that debts should continue to be remitted. Around the beginning of the 1st century CE Hillel established the prozbul loophole which enabled lenders to offer loans which could not be remitted, by redirecting the recipient of the repayment as the local Bet Din (court of law), which would then forward it to the original lender. Since the debt would be owed to a public institution instead of a private individual, it would not be remitted. [11] Hillel argued that otherwise the poor would not be able to get a loan in the year preceding the remission. [12] [13]

Ancient Greece and Rome

The obverse of Hadrian's sestertius commemorating the cancellation of tax arrears shows the emperor burning tax records Hadrian's sestertius - The Cancellation of Public Debt.png
The obverse of Hadrian's sestertius commemorating the cancellation of tax arrears shows the emperor burning tax records

In general the law in ancient Greece and Rome was more creditor-friendly and "harsh and unyielding" towards debtors. [14] Throughout antiquity the cancellation of debts, alongside land redistribution, was the main rallying cry of the poor. [15]

In response to a debt crisis in the 6th century BCE, the Athenians implemented a law of Solon providing for seisachtheia (σεισάχθεια), which cancelled all debts and retroactively annulled previous debts that had resulted in slavery and serfdom, freeing debt slaves and debt serfs. [16] According to Plutarch, interest-bearing debts were made illegal by the democratic government of Megara in the 6th century BCE while the creditors were forced to return the collected interest. This was treated as an extreme populist measure by Greek sources, [17] and historians are divided as regards the historicity of these events, considered to reflect later anti-democratic political thought. [18] The Spartan kings also implemented debt cancellations in their attempt to reform the state in the 3rd century BCE. [19] The Roman equivalent was called novae tabulae.

In the Ancient Rome the debt bondage known as nexum was abolished in 313 BCE. [20] However even after that the debtors were still required to perform compulsory labour, and could be imprisoned following a court judgement. [14] Appian mentions an attempt by praetor Asellio to revive the old law prohibiting the taking of interest in 89 BC which led to his murder, presumably by the creditors. [21] Later, partial debt cancellations were enacted by Sulla (by 10%) and then by Lucius Cornelius Cinna and Lucius Valerius Flaccus (by three quarters) in order to stabilise the economy ruined by the civil war. [22] [23] The Roman elites were firmly against debt relief, with Cicero denouncing it as an attack on property and the propertied classes. [24]

The predecessors of the bankruptcy law emerged in early Imperial Rome. Augustus instituted cessio bonorum , allowing debtors to voluntarily surrender their property to creditors and thereby avoid personal arrest and loss of legal standing (infamia). [25]

While Rome never enacted complete debt cancellation, several emperors wrote off tax arrears, that is, debts to the state treasury. [26]

China

The indebtedness of rural population was a constant government concern from the days of the Han dynasty. A variety of means were employed to deal with it, including full or partial debt relief. Often those loans whose repaid interest exceeded the principal were annulled. [27] The government accused the Buddhist monasteries (which had become major lenders to the peasantry by the 6th century CE) of issuing high-interest loans. During the purge of Buddhist monasteries in 845, more than 150,000 temple serfs were released from bondage, according to the official reports. [28]

Medieval Europe

Medieval canon law built upon Roman law and extensively discussed provisions to mitigate the harshness of debtors' punishments. Most commentators allowed for a debtor to be discharged and make a fresh start, after ceding to his creditors all his goods (or possibly all his goods except some bare necessities). These provisions later influenced English bankruptcy law. [25]

Early modern canon law

The question of debt relief was particulary important in the writings of early modern canon lawyers and theologians, frequently members of the School of Salamanca, [29] which were sensible to the needs of indigent debtors. [30] If the real debt relief (called remissio debiti) remained rarely promoted due to the binding of the contractual engagement and was more considered as a gift of the creditor, [31] the right to defer the payement (dilatio debiti) was thought as a temporary and more useful relief in case of extreme necessity or risks of important damages. [32]

Modern period

In the modern period debt discharge typically occurs through the process of bankruptcy. One of the first countries to establish personal bankruptcy (rather than company bankruptcy) was the United Kingdom, where the Bankruptcy Act 1869 allowed all people to file for bankruptcy. Currently, the benchmark for personal bankruptcy legislation is the US personal bankruptcy legislation, passed in 1978. Most Western European countries followed suit in the 1980s and 1990s while in southern and eastern Europe personal bankruptcy legislation was passed in the 2000s and 2010s. [33]

See also

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

Chapter 11 of the United States Bankruptcy Code permits reorganization under the bankruptcy laws of the United States. Such reorganization, known as Chapter 11 bankruptcy, is available to every business, whether organized as a corporation, partnership or sole proprietorship, and to individuals, although it is most prominently used by corporate entities. In contrast, Chapter 7 governs the process of a liquidation bankruptcy, though liquidation may also occur under Chapter 11; while Chapter 13 provides a reorganization process for the majority of private individuals.

In finance, default is failure to meet the legal obligations of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity. A national or sovereign default is the failure or refusal of a government to repay its national debt.

<span class="mw-page-title-main">Debt bondage</span> Form of slavery

Debt bondage, also known as debt slavery, bonded labour, or peonage, is the pledge of a person's services as security for the repayment for a debt or other obligation. Where the terms of the repayment are not clearly or reasonably stated, or where the debt is excessively large the person who holds the debt has thus some control over the laborer, whose freedom depends on the undefined or excessive debt repayment. The services required to repay the debt may be undefined, and the services' duration may be undefined, thus allowing the person supposedly owed the debt to demand services indefinitely. Debt bondage can be passed on from generation to generation.

Debt relief or debt cancellation is the partial or total forgiveness of debt, or the slowing or stopping of debt growth, owed by individuals, corporations, or nations.

<span class="mw-page-title-main">Debt consolidation</span> Form of debt refinancing

Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. This commonly refers to a personal finance process of individuals addressing high consumer debt, but occasionally it can also refer to a country's fiscal approach to consolidate corporate debt or government debt. The process can secure a lower overall interest rate to the entire debt load and provide the convenience of servicing only one loan or debt. Debt consolidation is sometimes offered by loan sharks, who charge clients exorbitant interest rates. Further regulation has been discussed as a result.

Title 11 of the United States Code sets forth the statutes governing the various types of relief for bankruptcy in the United States. Chapter 13 of the United States Bankruptcy Code provides an individual with the opportunity to propose a plan of reorganization to reorganize their financial affairs while under the bankruptcy court's protection. The purpose of chapter 13 is to enable an individual with a regular source of income to propose a chapter 13 plan that provides for their various classes of creditors. Under chapter 13, the Bankruptcy Court has the power to approve a chapter 13 plan without the approval of creditors as long as it meets the statutory requirements under chapter 13. Chapter 13 plans are usually three to five years in length and may not exceed five years. Chapter 13 is in contrast to the purpose of Chapter 7, which does not provide for a plan of reorganization, but provides for the discharge of certain debt and the liquidation of non-exempt property. A Chapter 13 plan may be looked at as a form of debt consolidation, but a Chapter 13 allows a person to achieve much more than simply consolidating his or her unsecured debt such as credit cards and personal loans. A chapter 13 plan may provide for the four general categories of debt: priority claims, secured claims, priority unsecured claims, and general unsecured claims. Chapter 13 plans are often used to cure arrearages on a mortgage, avoid "underwater" junior mortgages or other liens, pay back taxes over time, or partially repay general unsecured debt. In recent years, some bankruptcy courts have allowed Chapter 13 to be used as a platform to expedite a mortgage modification application.

A creditor or lender is a party that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption that the second party will return an equivalent property and service. The second party is frequently called a debtor or borrower. The first party is called the creditor, which is the lender of property, service, or money.

A debtor or debitor is a legal entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this debt arrangement is a bank, the debtor is more often referred to as a borrower.

Nexum was a debt bondage contract in the early Roman Republic. A debtor pledged his person as collateral if he defaulted on his loan. Details as to the contract are obscure and some modern scholars dispute its existence. It was allegedly abolished either in 326 or 313 BC.

<span class="mw-page-title-main">Bankruptcy in the United States</span>

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In finance, unsecured debt refers to any type of debt or general obligation that is not protected by a guarantor, or collateralized by a lien on specific assets of the borrower in the case of a bankruptcy or liquidation or failure to meet the terms for repayment. Unsecured debts are sometimes called signature debt or personal loans. These differ from secured debt such as a mortgage, which is backed by a piece of real estate.

Seisachtheia was a set of laws instituted by the Athenian lawmaker Solon in order to rectify the widespread serfdom and slavery that had run rampant in Athens by the 6th century BCE, by debt relief.

An individual voluntary arrangement (IVA) is a formal alternative in England and Wales for individuals wishing to avoid bankruptcy. In Scotland, the equivalent statutory debt solution is known as a protected trust deed.

Debt settlement is a settlement negotiated with a debtor's unsecured creditor. Commonly, creditors agree to forgive a large part of the debt: perhaps around half, though results can vary widely. When settlements are finalized, the terms are put in writing. It is common that the debtor makes one lump-sum payment in exchange for the creditor agreeing that the debt is now cancelled and the matter closed. Some settlements are paid out over a number of months. In either case, as long as the debtor does what is agreed in the negotiation, no outstanding debt will appear on the former debtor's credit report.

A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the foreclosure of a home. From the creditor's perspective, that is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.

Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. In most cases personal bankruptcy is initiated by the bankrupt individual. Bankruptcy is a legal process that discharges most debts, but has the disadvantage of making it more difficult for an individual to borrow in the future. To avoid the negative impacts of personal bankruptcy, individuals in debt have a number of bankruptcy alternatives.

A secured transaction is a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower's default. The terms of the relationship are governed by a contract, or security agreement. In the United States, secured transactions in personal property are governed by Article 9 of the Uniform Commercial Code (U.C.C.).

A cram down or cramdown is the involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors.

<i>Forgive Us Our Debts</i> 2018 film directed by Antonio Morabito

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References

  1. 1 2 Hudson 2018, p. 3.
  2. ↑ De Graef, Katrien (2021). "Bad moon rising : the changing fortunes of early second-millennium BCE Ur". Rencontre Assyriologique Internationale. 62: 68. doi:10.1515/9781646021512-007. ISBN   9781646021512.
  3. ↑ Hudson 2018, p. 50.
  4. ↑ Hudson 2018, p. 29-30.
  5. ↑ Harms, William (1996-02-01). "Linking ancient peoples". The University of Chicago Chronicle. 15 (10). Retrieved 2009-02-26.
  6. ↑ Hudson 2018, p. 31.
  7. ↑ Graeber 2012, p. 217-219.
  8. ↑ Diodorus Siculus, Bibliotheca historica, 1, 79
  9. ↑ Hudson 2018, p. 181-182.
  10. ↑ Hudson 2018, p. 219.
  11. ↑ ערוך השולחן חושן משפט סימן סז סעיף ז
  12. ↑ Hudson 2018, p. 220-221.
  13. ↑ Gittin 36a.
  14. 1 2 Finley 1973, p. 40.
  15. ↑ Finley 1973, p. 80.
  16. ↑ Aristotle, Athenian Constitution, The Seisachtheia
  17. ↑ Graeber 2012, p. 191,427.
  18. ↑ Forsdyke, Sara (2005). "Revelry and riot in Archaic Megara: democratic disorder or ritual reversal?". The Journal of Hellenic Studies. 125: 73. doi:10.1017/S0075426900007114.
  19. ↑ Green 1990, p. 257.
  20. ↑ Finley 1973, p. 46.
  21. ↑ Appian. The Civil Wars. p. 1.6.54. Retrieved 11 June 2023.
  22. ↑ Keaveney 2005, p. 56.
  23. ↑ Seager 1992, p. 180.
  24. ↑ Finley 1973, p. 143.
  25. 1 2 W. Pakter, The origins of bankruptcy in medieval canon and Roman law, in Proceedings of the Seventh International Congress of Medieval Canon Law, 1984, ed. P. Linehan, Vatican City, 1988, 485-506.
  26. ↑ Andreau, Jean. "Personal endebtment and debt forgivness [sic] in the Roman empire". cadtm.org. Retrieved 23 June 2023.
  27. ↑ Graeber 2012, p. 259.
  28. ↑ Graeber 2012, p. 265.
  29. ↑ For example, see Decock, Wim (2020). "Poor and insolvent: Debtor relief in Alvarez de Velasco's De privilegiis pauperum (1630)". In Mäkinen, V.; et al. (eds.). Rights at the margins. Historical, Legal and Philosophical Perspectives. Brill. pp. 63–84.
  30. ↑ Decock 2017, p. 125-126.
  31. ↑ Decock 2017, p. 137-140.
  32. ↑ Decock 2017, p. 126-137.
  33. ↑ Walter, György; Krenchel, Jens Valdemar (2021). "The Leniency of Personal Bankruptcy Regulations in the EU Countries". Risks. 9 (162): 162. doi: 10.3390/risks9090162 . hdl: 10419/258246 .

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