History of Bankruptcy Law
Last week we introduced the origin of bankruptcy and the history of how it came to be what it is today. This week we are going to dive deeper into the progression and how bankruptcy laws today have become what they are.
When the Constitution was signed in 1787, it empowered Congress to pass uniform laws on the subject of bankruptcies, but it took them more than 100 years to actually do something with it.
The United States of America did not begin with a national bankruptcy law. In fact, it did not have the ability to even have one. The Continental Congress established the United States with its founding constitution that consists of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777. They were not ratified by the 13 states until 1781, the Articles of Confederation did not provide for a nationwide bankruptcy system.
The American Revolutionary War ended in 1782, and with that came changes to the U.S. Constitution that was drafted in 1787 and was ratified by the states in 1789. This time, it did allow for a national bankruptcy law. However, it did not create the laws, it merely empowered Congress to pass uniform laws on the subject of bankruptcies.
The Constitution may have empowered Congress, but Congress stayed dormant on the subject for nearly half our nation’s history. Three different times during the 1800s, a federal bankruptcy law was passed in the wake of a financial “panic”, but was immediately repealed once the financial crises were over.
During the long periods when there was no nationwide law to govern bankruptcy, the states developed their own patchwork of bankruptcy and debtor-creditor laws as needed. But these local laws became more and more cumbersome and complicated as commerce moved to a more national enterprise.
Finally, in 1898 Congress passed it first act involving bankruptcy. The Bankruptcy Act of 1898 was the first one to not be quickly repealed when an immediate need wasn’t seen, and it lasted for 80 years. This law was inspired by commercial creditors in order to help in the collection of debts. However, it included the following very important debtor-friendly stipulation: most debts became dischargeable, and creditors would no longer have to pay a set minimum percentage of their debts.
This Bankruptcy Act of 1898 was amended many times, most significantly in 1938 in the financial crisis that was the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, known today as Chapter 13.
The 1978 Bankruptcy Reform Act was the result of a decade of study and debate that gave us the Bankruptcy Code we use today. It has been amended every few years since then. The most significant of which was in 2005 with BAPCPA or Bankruptcy Abuse Prevention and Consumer Protection Act.