The History of Bankruptcy

Bankruptcy pre-dates the founding of the United States of America, as it certainly was pondered, if not strongly considered, by the founding fathers, long before its inclusion in the U.S. Constitution.

Article I, Section 8, of the United States Constitution authorizes Congress to enact “uniform Laws on the subject of Bankruptcies.” However, Congress did not immediately act on this grant of authority.

As a result of this Congressional inactivity, several states established their own extensive bankruptcy systems in the absence of any uniform federal bankruptcy laws. Many of these state systems were excessively pro-creditor and provided for the imprisonment of debtors.

Here’s a Brief History of Bankruptcy Law in the United States:


The Bankruptcy Act of 1800 was predominantly creditor-oriented and only permitted the involuntary bankruptcies of merchant debtors.


Federal debtors’ prisons were formally abolished.

The History of Bankruptcy


The Financial Panic of 1837 occurred. Causes: speculative lending practices in western states, a sharp decline in the price of cotton, a collapsing land bubble, international specie flows, and restrictive lending policies overseas in Great Britain. During the years 1837 to 1844, the U.S. generally experienced wage and price deflation.


Congress enacted the Bankruptcy Act of 1841 after the Financial Panic of 1837. This Act allowed, for the first time, all types of debtors, not just merchants, to file voluntary bankruptcies without creditor initiation. Also, a bankruptcy debtor was also able to receive a discharge. These were revolutionary changes in the law of insolvency.


The Bankruptcy Act of 1841 was repealed.


Congress enacted the Bankruptcy Act of 1867, which was very detailed and applied to many situations and circumstances involving insolvency. For the first time, involuntary bankruptcies were permitted for all individuals, not just merchants. The United States District Courts were required to appoint a “register in bankruptcy” (the first bankruptcy judges) in the performance of duties relating to bankruptcy cases.


The Bankruptcy Act of 1867 was repealed.


Congress enacted the Bankruptcy Act of 1898 and, although amended and replaced many times, there have been no further periods of repeal when there were no federal bankruptcy laws in effect throughout the country.


Congress enacted the Bankruptcy Reform Act of 1978. This legislation created the “Bankruptcy Code” – the uniform federal law that governs all bankruptcy cases. The Bankruptcy Code has been amended several times since 1978.


Congress enacted BAPCPA – the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Blanketed by banks and other lobbying groups, Congress “reformed” the bankruptcy laws to make it more difficult for consumers to file bankruptcy cases. It applies to cases filed on or after October 17, 2005. Under BAPCPA, filing under Chapter 7 became more difficult because of more stringent guidelines and eligibility requirements. The goal of pro-BAPCPA reformists was to encourage Chapter 13 filings instead of Chapter 7 filings to keep the latter from what they perceived as ongoing abuse.

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