U. S. Bankruptcy Laws Took Very Long to Get Off the Ground

Posted by Kevin on January 30, 2018 under Bankruptcy Blog | Be the First to Comment

The Constitution empowered Congress to “pass uniform laws on the subject of bankruptcies,” which then took more than 100 years to do so.

 

• The United States started its existence without a national bankruptcy law. The Second Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777.  The Articles of Confederation were not ratified by the original 13 states until 1781.  The Articles did not provide for a nationwide bankruptcy system.
• The American Revolutionary War formally ended in 1783 with the signing of the Treaty of Paris.  The Articles of Confederation proved inadequate, so in 1787, a constitutional convention was called to draft a new constitution.  The U.S. Constitution was ratified by the states in 1789.  It did allow for, yet did not create, a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
• Three different times during the 1800s, a federal bankruptcy law was passed in direct reaction to a financial “panic.” But these federal laws were each repealed after the financial crises were over. The first act was passed in 1800 but repealed in 1803. The second was passed in 1841 but repealed in 1847.  The third bankruptcy act was passed in 1867 but repealed in 1878.
• During the long periods when there was no nationwide law in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws. But these local laws became more and more cumbersome as commerce became ever more interstate.
• Finally, Congress got it right when it passed the Bankruptcy Act of 1898.   The 1898 Act lasted 80 years.  This law was inspired by commercial creditors to help in the collection of debts.  However, it included the following very important debtor-friendly provisions: most debts became dischargeable, and creditors no longer had to be paid a certain minimum percentage of their debts.
• This Bankruptcy Act of 1898 was amended many times, significantly in 1938 in reaction to the Great Depression. Among other things, the 1938 amendment added the “chapter XIII” wage earners’ plans, the predecessor to today’s Chapter 13s.
• The 1978 Bankruptcy Reform Act, the result of a decade of study and debate, gave us the Bankruptcy Code. It has been amended every few years since then, most significantly in 2005 with BAPCPA, the so–called Bankruptcy Abuse Prevention and Consumer Protection Act.