History of Bankruptcy in the United States
Bankruptcy in the United States has had a long and varied history since the framing of the U.S. Constitution. Initially, the framers of the Constitution sought to model bankruptcy laws after English law on the subject. However, since that time, the law has taken many twists and turns that brings it to the modern set of laws that exist today.
The Constitution makes a mention of the ability of Congress to create laws relating to bankruptcy.
This provision can be found in Article I, section 8, which gave Congress the power to: "…establish…uniform Laws on the subject of Bankruptcies throughout the United States." However, Congress passed no laws relating bankruptcy until more than a decade after the Constitution was ratified.
In the meantime, multiple states had established very extensive bankruptcy systems in the absence of a federal system. In fact, many of these systems were very pro-creditor and provided for the imprisonment of debtors!
First Federal Law
In 1800, the Congress passed the first federal law relating to bankruptcy, called the Bankruptcy Act of 1800. Similar to many state bankruptcy systems at the time, the Bankruptcy Act of 1800 was very creditor oriented and only permitted involuntary bankruptcies of merchant debtors. Debtors would abuse the system by requesting that a friendly creditor initiate the bankruptcy. However, due to many complaints of corruption and favoritism, the law was repealed in 1803. The states continued to run various bankruptcy systems in the absence of a federal law.
The Next Federal Bankruptcy Law
In 1841, after the financial Panic of 1837, Congress passed another bankruptcy law, called the Bankruptcy Act of 1841. For the first time, this bankruptcy law permitted voluntary bankruptcies to be filed by debtors, a modern revolution in the law. In fact, a debtor could file for bankruptcy and receive a discharge of debt. In addition, any individual could be a debtor, not just a merchant as under the 1800 law. The power to grant the discharge and judge other matters relating to bankruptcy rested with the United States District Courts.
Unfortunately, however, creditors viewed the 1841 law as providing few payments to creditors and discharging many debtors. Accordingly, the 1841 law was repealed in 1843.
Third Time?
After another financial panic in the United States and the U.S. Civil War, the Congress decided to try again. The Bankruptcy Act of 1867 was passed. The 1867 Act was very detailed and covered a variety of situations. This law was the first to allow involuntary bankruptcies for any individual, not just merchants. The United States District Courts were required to appoint a "register in bankruptcy" in the performance of duties relating to bankruptcies. The registers were essentially the earliest bankruptcy judges.
Unfortunately, this law too failed due to similar criticisms as prior laws, in 1878.
1898
The year of 1898 was the first time that Congress passed a bankruptcy law that became, essentially, permanent. The Bankruptcy Act of 1898, although amended and replaced multiple times, there was no further periods of repeal and/or times when the federal government had no bankruptcy laws.
Reform of 1978
After several amendments of the 1898 law, Congress passed the Bankruptcy Reform Act of 1978. This law made comprehensive and sweeping changes to the law. This law brought into effect what is known as the "Bankruptcy Code." This law made a variety of changes, including drastically increasing the scope of the power of bankruptcy judges.
Although there are many other changes prior to and subsequent to the 1978 law, these are the major milestones in the history of bankruptcy in the United States. It has been a continual tug of war between various interests, mainly creditors.
The Constitution makes a mention of the ability of Congress to create laws relating to bankruptcy.
This provision can be found in Article I, section 8, which gave Congress the power to: "…establish…uniform Laws on the subject of Bankruptcies throughout the United States." However, Congress passed no laws relating bankruptcy until more than a decade after the Constitution was ratified.
In the meantime, multiple states had established very extensive bankruptcy systems in the absence of a federal system. In fact, many of these systems were very pro-creditor and provided for the imprisonment of debtors!
First Federal Law
In 1800, the Congress passed the first federal law relating to bankruptcy, called the Bankruptcy Act of 1800. Similar to many state bankruptcy systems at the time, the Bankruptcy Act of 1800 was very creditor oriented and only permitted involuntary bankruptcies of merchant debtors. Debtors would abuse the system by requesting that a friendly creditor initiate the bankruptcy. However, due to many complaints of corruption and favoritism, the law was repealed in 1803. The states continued to run various bankruptcy systems in the absence of a federal law.
The Next Federal Bankruptcy Law
In 1841, after the financial Panic of 1837, Congress passed another bankruptcy law, called the Bankruptcy Act of 1841. For the first time, this bankruptcy law permitted voluntary bankruptcies to be filed by debtors, a modern revolution in the law. In fact, a debtor could file for bankruptcy and receive a discharge of debt. In addition, any individual could be a debtor, not just a merchant as under the 1800 law. The power to grant the discharge and judge other matters relating to bankruptcy rested with the United States District Courts.
Unfortunately, however, creditors viewed the 1841 law as providing few payments to creditors and discharging many debtors. Accordingly, the 1841 law was repealed in 1843.
Third Time?
After another financial panic in the United States and the U.S. Civil War, the Congress decided to try again. The Bankruptcy Act of 1867 was passed. The 1867 Act was very detailed and covered a variety of situations. This law was the first to allow involuntary bankruptcies for any individual, not just merchants. The United States District Courts were required to appoint a "register in bankruptcy" in the performance of duties relating to bankruptcies. The registers were essentially the earliest bankruptcy judges.
Unfortunately, this law too failed due to similar criticisms as prior laws, in 1878.
1898
The year of 1898 was the first time that Congress passed a bankruptcy law that became, essentially, permanent. The Bankruptcy Act of 1898, although amended and replaced multiple times, there was no further periods of repeal and/or times when the federal government had no bankruptcy laws.
Reform of 1978
After several amendments of the 1898 law, Congress passed the Bankruptcy Reform Act of 1978. This law made comprehensive and sweeping changes to the law. This law brought into effect what is known as the "Bankruptcy Code." This law made a variety of changes, including drastically increasing the scope of the power of bankruptcy judges.
Although there are many other changes prior to and subsequent to the 1978 law, these are the major milestones in the history of bankruptcy in the United States. It has been a continual tug of war between various interests, mainly creditors.