BANKRUPTCY. — By this term (from Lat. *fallere* = to fail), is denoted the act of one who, unable to satisfy all his debts, makes a cession of his goods so that provision may be made for the estate to be distributed, as far as possible justly, toward the extinction of the debts.
It is evident that the debtor remains personally bound to the full payment of his debts, except for remission, compensation, or composition. There are, however, causes which, without extinguishing the obligation to repay, authorize a delay in payment. Among these may be listed financial distress. Ordinarily, such distress is morally culpable when it is announced without sufficient assurance that the situation of the creditors will not worsen through one’s own actions, or without a well-founded hope of recovery to continue business despite the distress. And if this should occur, one is responsible for further damages.
In such circumstances, natural law requires that: a) the prudent legitimate heir should preserve those things which still exist, not having passed into the property of the debtor, as entrusted goods, lent goods, found goods, stolen goods, etc.; b) privileged creditors, such as those with mortgages, should be satisfied before others; c) then provision should be made for the other creditors, among whom, even in partial payment, a certain order or priority in debt or claim must reasonably be maintained. It is necessary, however, that what remains be made available to the creditors, after deducting what is necessary for an honest sustenance according to one’s station, and with the obligation remaining to complete repayment when able. One would therefore commit an injustice if, unable to satisfy all creditors, one sold his goods to his children or transferred them to his wife. An exception may occur when the wife herself is truly a creditor.
In modern legal systems, however, the State usually intervenes with its laws, indicating the path to follow or compelling adherence to it through various additions to what would be pure natural law. The culmination of these precautionary measures is repressive; and bankruptcy, i.e., the state of insolvency declared by a court judgment, from which follow special personal and real effects, leads to a concursus procedure culminating in the liquidation of assets and the distribution of the net proceeds among the creditors.
Ancient laws weighed heavily upon the debtor in a manner that violated the most fundamental rights of the human person. The debtor was held, in the first or second instance, with his own person or that of his family and reduced to a condition of servitude. Without delving into the slow historical evolution, as regards Eastern rights it will suffice to refer to the vivid description found in a parable of the Gospel of St. Matthew (18:23-34). As for ancient Roman law, it will suffice to recall the *ius noxae dandi*. Even in medieval law, the *cessio bonorum* was accompanied by so many humiliating circumstances as to shatter personal dignity. The debtor, nearly naked and barefoot, keeping only one garment, had to sit upon a stone in the public square and remain there for an entire day, saying: *cedo bonis* ("I yield my goods").
In modern law, the inalienable rights of the bankrupt are sufficiently safeguarded, but it is necessary to keep these precedents in mind to understand the language, which may seem excessively accommodating toward the debtor, of some moralists, especially ancient ones.
In Italian law, now codified in Royal Decree No. 267 of March 16, 1942, and in certain articles of the Civil Code (1977-86, 2288, 2308), first of all a temporary suspension of payments may give rise to the procedure of controlled administration with the appointment of a government commissioner. Moreover, not all entrepreneurs or companies are subject to the legislative provisions regarding bankruptcy; for some, such as entrepreneurs or entities (e.g., public entities), compulsory administrative liquidation applies.
Various avenues are then open before reaching a declaration of bankruptcy; first among these is composition.
Composition may be extrajudicial, being a kind of transaction between debtor and creditors, who accept the percentage offered to them, or judicial. The latter may be either a preventive composition or a composition in bankruptcy.
Others, however, admit it, albeit with some hesitation, basing themselves on a supposed common persuasion that considers any further obligation extinguished with the termination of judicial action in the various bankruptcy provisions (A. Lehmkuhl, E. Gémicort, J. Salsmans).
Still others, such as Vermeersch, would prefer, and perhaps with greater justification, that a moral judgment be brought to bear on individual bankruptcy rights. Thus, embracing this thesis, modern authors speak of the extinction of every obligation, even of a moral nature, in the English legal system (Crowley, Slater), in that of the U.S.A. (Bankruptcy Act, July 1, 1898, with subsequent amendments, Martin), and in Dutch law (Duynstee). The same cannot be said in Italy, in light of Articles 1891 and 1892, paragraph 2 of the Civil Code, where novation is discussed. The first states: "If there is no contrary agreement, the debt is released toward the creditors only from the day on which they receive the portion due to them from the proceeds of the liquidation, and within the limits of what they have received"; the second then states: "The will to extinguish the previous obligation must be evident without ambiguity." Nowhere does the will of the Italian legislator appear to extinguish previous natural obligations through bankruptcy provisions. The same may be said of the legal systems of various other nations: France, Germany, Belgium, Spain, etc. (cf. A. Vermeersch, *Theologia moralis*, 3rd ed., Rome 1937, no. 467, p. 477).
A special problem of a moral, social, and political nature is presented by the bankruptcy of States and similar measures, such as monetary devaluation, for which V. MONETARY DEVALUATION.
Brazil: In addition to treatises on moral theology and civil law, for the history of the institution V. L. M. da Apicella, *Tuttenau paper-rum sive tractatus de dilatione quinquennali, de moratoria, et cessione bonorum*, Naples 1621. For current law, practice, and ethical evaluation: G. Bricchierai, *Il mondo degli affari in morale*, Brescia 1935, pp. 283-368; J. Vandamme, "Banqueroute," in DSoc., III, cols. 231-58; J. Demais, "Banqueroute des collectivités publiques," ibid., cols. 258-61; S. Fatta, *Istituzioni di diritto fallimentare*, 2nd ed., Rome 1946; L. Lordi, *Il f. e le altre procedure concorsuali*, Naples 1946; R. Provinciali, *Attualità di diritto fallimentare*, Milan 1948; S. Sotgiu, *La cessione dei beni ai creditori*, Turin 1949.