Bankruptcy Discharge and the Emergence of Debtor Rights in Eighteenth Century England

Bankruptcy is a precise legal process defining the rules when debtor fails to repay their debts. These rules determine willingness to lend and to borrow and thus can affect economic growth. In 1706, the English Parliament passed a bankruptcy statute that provided potential rights for bankrupts and represents a fundamental change in the rules regarding bankruptcy. Where previously a bankrupt could exit bankruptcy only upon full repayment of debts, creditors could now choose to discharge a bankrupt prior to full repayment of his debts. In this paper, we develop a simple model to explore why creditors might discharge a bankrupt, and conduct an empirical analysis of archival bankruptcy data to show that discharges actually occurred. Not only did bankrupts benefit when creditors chose to discharge bankrupts prior to full payment, but also we find that creditors could benefit due to greater asset revelation by bankrupts.