July 2020

Bankruptcy law in America has a long, storied history. It would take a whole section in the Library of Congress to give a full description of that history. So, we are going to summarize that information for your convenience.

When It All Started

1787.

This is the year that the United States Constitution was drafted and signed by all 13 states. Bankruptcy is enshrined in the U.S. Constitution (Article 1, Section 8). It gives congress the right to establish “uniform Laws on the subject of bankruptcies throughout the United States.”

Developments Over the Next 150 Years

As with all political matters, bankruptcy policy was subject to years of troubled debate. In 1800, Congress passed the Bankruptcy Act. This gave district judges the authority to create commissions to help oversee bankruptcy cases. However, too much power was given to creditors in this act. Because of corruption and high expenses, this act was repealed only 3 years later. For 30 years after, states took up the responsibility to regulate bankruptcy law.

In 1839 a development took place which was very favorable to those in large amounts of debt. A federal law outlawed imprisonment for debt. Can you imagine that? Without this law those looking to file bankruptcy would have the added stress of possible imprisonment for their debt!

In 1841 Congress passed a new Bankruptcy Act. This act was very similar to the Bankruptcy Act of 1800. This law, though, gave significantly more rights to those in debt than the original act gave. Some of these included:

• Allowing those who owe money to file for bankruptcy, rather than just the creditors initiating a bankruptcy case
• Allowing personal assets to cover as collateral for debts
• Allowing debtors in any type of industry to file for bankruptcy

This act, though, was repealed only 2 years later.

Two more Bankruptcy Acts were signed into law over the next  50 years.

Each of these acts essentially stipulated more protections and rights for debtors in bankruptcy cases. Each of these acts were relatively more successful than their predecessors in that they survived as law for a combined 111 years.

This success was due in large part to the lessons learned in bankruptcy law in the early days of our Constitutional experiment. 

The Chandler Act of 1938 was another factor that helped the latter Bankruptcy Act to last for so long.

This act categorized previous reorganization amendments to the 1898 law into “Chapters”

• Chapter X for corporate reorganizations
• Chapter XI for arrangements
• Chapter XII for real property arrangements
• Chapter XIII for wage earner plans

The Bankruptcy Reform Act of 1978

When signed into law bankruptcy was further federalized. The president was given the responsibility of assigning bankruptcy judges to serve 14 year terms. It also consolidated Chapter X, XI, and XII Bankruptcy into Chapter XI bankruptcy.

This act stood only for about 15 years.

The Bankruptcy Reform Act of 1994

Simply put, this act gave the district bankruptcy courts more legal authority to investigate proceedings by creating appellate panels.

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

The 2005 law is still in effect today, so it is the most important for those seeking bankruptcy to understand.

This act substantially altered the 1978 and 1994 acts by:

• Creating a means test for debtors
• Mandating credit counseling for relief plans
• Requiring financial management training for Chapter 7 and Chapter 13 debtors
• Permitting immediate dismissal for failing to file required documents

There were also several other revisions to the law, but the aforementioned are the most pertinent to those seeking bankruptcy today.

DISCLAIMER: The above blog post is just advice, and you will be better served to call David S. Clark with your bankruptcy questions. This blog contains helpful tips and advice, but is not professional legal advice, and shouldn’t treated as such.