The English word "bankruptcy" is said to derive from the Italian "banca rotta" or "broken bench." Supposedly it is a reference to the benches merchants would occupy in the Roman markets. According to the tale, soldiers (or creditors, depending on the version of the story) would break a merchant's bench (over his head in some versions of the story) as a warning to the public that they should not do business with him because he did not pay his debts.
The American bankruptcy law is directly descended from the English law, which is believed to have begun under Henry VIII with the "Act against such persons as do make bankrupts" in 1542. In many respects, this law seems the direct opposite of the modern concept of bankruptcy. For one thing, in 1542, "bankrupt" was not a state a person could be in, but rather "bankrupts" were acts a person could commit. "Bankrupts" seem to be most closely akin to the modern concepts of fraudulent conveyances and bankruptcy fraud. The law was essentially criminal in nature. For another thing, not just any person could "make bankrupts," for the law only applied to merchants. Another telling difference was the fact that a bankruptcy action could only be brought by a creditor against a debtor. In any event, a debtor would not want to invoke a voluntary bankruptcy even if he could because there was no discharge of his debts after his property was seized. About the only aspect of the 1542 law to survive today is the liquidation of the debtor's assets for the benefit of the creditors.
The first major conceptual shift in the bankruptcy law came in 1705 with the Statute of Anne. The Statute introduced the concepts of discharge and a modest exemption of assets which were granted to debtors who cooperated in their bankruptcy proceedings. Punishments for those who did not cooperate were also increased, up to and including death (although the death penalty was rarely used). This marked recognition of the distinction between the dishonest debtor -- he who "made bankrupts" in 1542 parlance -- and the honest but unfortunate debtor -- he who occupies an insolvent or "bankrupt" state in modern parlance. The remainder of the history of bankruptcy can be seen as a slow shift in the focus and purpose of the law from punishing the first group to financially rehabilitating the second group. Much of what remains "broken" and retrograde in the modern bankruptcy law can be best explained by failures to appreciate the distinction between the two groups and the fact that bankruptcy law is now "about" the second group rather than the first.
The existence of discharge led slowly to the creation of voluntary bankruptcy. Debtors began to enlist the aid of sympathetic creditors to initiate bankruptcy suits that would lead to their discharge. Eventually this practice, known as "collusive bankruptcy" was given official sanction by the English Act of 1825. Actual voluntary bankruptcy finally followed in England in 1844.
The U.S. Constitution's Bankruptcy Clause found in Article 1, Section 8 ("The Congress shall have Power...To establish... uniform Laws on the subject of Bankruptcies throughout the United States") was drafted to prevent a repeat of the chaotic experience of 13 colonies with 13 different sets of debt collection and bankruptcy laws. (Apparently scoundrels made bankrupts quite often by running off to colonies that did little to enforce debts from other colonies.) However, Congress made little use of this power. It passed a temporary bankruptcy laws in 1800, 1841, and 1867, but repealed each within no more than a decade or so. The 1841 act, championed by Daniel Webster and Joseph Story, was the most interesting of the bunch. It was the first voluntary bankruptcy law, beating England's by a couple years; was available to all people, instead of just merchants; and was firmly grounded in the concept of the honest but unfortunate (and therefore insolvent) debtor. The 1841 act also settled the question of the Constitutionality of voluntary bankruptcy. (Evidencing the difficult conceptual shift from the illegal acts, "bankrupts," to the insolvent state, "bankrupt," there was debate at the time about whether voluntary bankruptcy proceedings for (non-fraudster) non-merchants was even within the meaning of "bankruptcies" in the Constitution.)
Congress finally passed a permanent bankruptcy law in 1898, known as the Bankruptcy Act, which contained many of the same general elements as the 1841 act. In 1978 the Bankruptcy Act was replaced by the Bankruptcy Code. While the Code was a substantial redrafting that more cleanly incorporated the amendments to the 80-year-old Act, it did not mark the sort of dramatic changes seen in the 1705 or 1841 acts. It did however strengthen many modern features of bankruptcy law, such as discharge, and sought to improve many aspects, such as the underused "wage-earner's bankruptcy" (now Chapter 13).
The Bankruptcy Code remains the bankruptcy law of the United States today. It has been significantly amended in 1984, 1986, 1994, and 2005. Major features of the amendments include (1) the creation of Chapter 12 in reaction to a farm crisis in 1986, (2) a resolution of the Constitutional problem of Bankruptcy Courts not being Article 3 courts, and (3) deeply regressive elements such as the U.S. Trustee program and the means test.