The Bankruptcy Clause of the U.S. Constitution

Posted by Kevin on August 11, 2013 under Bankruptcy Blog | Be the First to Comment

The Constitutional Convention adopted the U.S. Constitution. Its Bankruptcy Clause was a quiet but crucial component of a much stronger national government.

Most people know that the U.S. Constitution refers explicitly to bankruptcy. The provision is short and sweet. Included among a long list of legislative powers given to Congress in Article 1 of the Constitution is the power “to establish… uniform laws on the subject of bankruptcies throughout the United States.”  (Article 1, Section 8, Clause 4.) Here’s some of the exciting (if you are at all historically inclined) backstory.

The Bankruptcy Clause Goes Right to the Heart of the Constitution’s Purpose

Back when we were kids we learned in school that before we had the Constitution, our new country floundered during its first few years under the loose Articles of Confederation. Each state acted pretty much as a sovereign country, with its own money, independent militia, and laws regulating trade with other states and even with other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws on interstate commerce, including on bankruptcy.

At the heart of the issue at the Constitutional Convention of 1787 and during the following year and a half of its ratification by the states was how strong of a national government to create. During colonial times and under the Articles of Confederation each colony or state could have its own laws of bankruptcy and insolvency, creating intense confusion and conflict among them. A national government with power over interstate commerce would sensibly avoid these problems by providing a bankruptcy law uniform among all the states.

Bankruptcy Almost Left Out of the Constitution

And yet the initial draft of the U. S. Constitution did not contain any reference to bankruptcy. Then towards the end of the Convention the issue went to a committee, which recommended the addition. The clause was adopted by the Convention by a vote of 9 states against one. “The only vote against was by Connecticut, with…  concern that bankruptcies could be punished by death [!!], as was still the law in England. Connecticut also had a comprehensive bankruptcy law of its own, which it wanted to preserve free of federal control.” (From “A Brief History of Bankruptcy Law,” by Prof. Charles J. Tabb.)

In the next blog: what The Federalist Papers, 85 essays written by Alexander Hamilton, James Madison, and John Jay to convince readers to ratify the Constitution, say about the Bankruptcy Clause.