The first known bankruptcy law was passed in England in 1542 to give creditors remedies (other than imprisonment) against debtors who did not pay their bills. Under this law, debtors were considered quasi-criminals.
In 1570, England passed its second bankruptcy law:
1. Only a creditor could commence a bankruptcy case—that is, bankruptcy was involuntary for the debtor.
2. Only a merchant could be a debtor. (Ordinary people were still being thrown in jail.)
3. During the bankruptcy case, a bankruptcy commissioner (like the modern trustee) seized the bankrupt’s assets, sold them and distributed them pro rata to the creditors.
4. At the end of the case, the debtor did not obtain a discharge of the balance, and so creditors could continue their collection efforts.
5. Over the next 100 or so years, Parliament made a few changes to this bankruptcy law, primarily to let the commissioner take more of the bankrupt’s assets and to increase penalties for noncompliance. A 1604 amendment permitted the debtor’s ear to be cut off.
In 1705, Parliament made sweeping changes:
1. A cooperative bankrupt could receive a discharge of the unpaid balance of his debts.
2. A cooperative bankrupt would also be entitled to keep certain property—the first exemptions—based on the total value of his assets.
3. An uncooperative bankrupt who was defrauding his creditors could be put to death, although records indicate that only five debtors were put to death during the 115 years this provision existed.
Early independent America had no bankruptcy laws. Neither the Articles of Confederation nor the U.S. Constitution contained specific provisions for bankruptcy—although the Constitution gave Congress the power to establish uniform bankruptcy laws.
In 1800, by one vote, Congress passed the first American bankruptcy law. It was very similar to the 1705 British law, although a fraudulent bankrupt could not be sentenced to death. It was repealed three years later.
Congress tried again in 1841, after the abolishment of debtors’ prisons. The new act allowed for both merchant and non-merchant debtors. Debtors could claim basic exemptions, although there were limits on what debts could be discharged. Debtors as well as creditors could file cases. The creation of debtor filings—voluntary bankruptcies—was a watershed event. Thousands of debtors received discharges and creditors received very little. The act was repealed after two years.
Congress tried yet again in 1867. This law allowed for both merchant and non-merchant debtors, and allowed voluntary and involuntary cases. Debtors had to take an oath of allegiance to the United States (this was just after the Civil War). This law lasted 11 years and was repealed because too many debtors were using it and creditors were getting little in return.
Modern American bankruptcy has its permanent beginning with the Bankruptcy Act of 1898. This law allowed both voluntary and involuntary cases, permitted debtors to claim exemptions and removed most barriers for discharging virtually all debts. One commentator of the time suggested Congress went too far in favoring debtors. He reminded them that bankruptcy was primarily a “commercial regulation,” not a general debtor “jubilee” as provided in the Bible.
During the 1920s, the act was amended to add grounds for denial of discharge and debts excepted from the discharge. In 1938, Congress overhauled American bankruptcy law. Although most changes affected business bankruptcies, this law also created Chapter XIII, the wage earners’ repayment plan.
The next major change came with the enactment of the Bankruptcy Act of 1978, the law that exists today. It was amended in 1984 to add several new categories of nondischargeable debts. The law has been tinkered with since then, but Congress has not changed the essential nature of bankruptcy in America for 100 years. However, ongoing efforts by the Congress will likely change that in the near future.
