The origin of the word bankruptcy can be traced back to Italy during the Medieval Period. In those days, when a businessman was unable to pay his debts, the practice at that time was to destroy his trading bench. From the term "broken bench" or "banca rotta" comes the word "bankruptcy".

Back then, tradesmen unable to repay their debts were dealt with harshly. The primary focus in that period was on recovering the interests of the creditors, not the welfare of the debtor. In Old England, for example, penalties could be draconian and range from imprisonment (debtors prison) to the death penalty.