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A Brief History of Bankruptcy in the United States

The very first bankruptcy laws were passed by Henry VIII in 1542. At that time, bankrupt individuals were considered criminals and, therefore, subject to punishment under the law. The bankrupt party may be sentenced to debtors’ prison or face other punishments. 

In the U.S., the first bankruptcy laws were passed in 1800 as a response to bad economic conditions. The rule was repealed in 1803, and there were no provisions for bankruptcy until 1841. In most cases, the government could issue a ruling that forced an individual into bankruptcy. In other words, it was not the voluntary process that it is today. 

Modern bankruptcy laws do not force individuals into bankruptcy or send debtors off to prison. Instead, they act as a means of protecting a debtor against debt they can no longer afford to pay. In other words, these laws act to rehabilitate the debtor as opposed to punishing them. 

20th-Century Bankruptcy Laws

The Bankruptcy Act of 1898 was the first to include corporations as opposed to individual debtors. The company could be put into “equity receivership,” which was a provision that allowed the government to dissolve a company and sell off its assets to repay creditors. There were several changes to this law during the 1930s, and the reality of the Great Depression yielded more bankruptcy laws and changes to the rules. 

The Bankruptcy Acts of 1933 and 1934. In 1934, the Supreme Court ruled that the primary purpose of bankruptcy was to offer debtors a fresh start from their financial burdens. This would herald the starting point of how bankruptcies are handled today.

In 1978, Congress passed the Bankruptcy Reform Act of 1978. This act continues to serve as the uniform federal bankruptcy law that governs all bankruptcy cases that are filed in U.S. courts. The federal law revamped bankruptcy practices, allowing debtors to file under Chapter 7 and Chapter 13 of the bankruptcy code. In addition, businesses were allowed to file under Chapter 11, which serves as the primary way for bankruptcy companies to reorganize their debts to this day. 

Instead of going to prison or even being executed for accumulating too much debt, debtors can discharge unsecured debt under Chapter 7 and be protected from creditors. The bankruptcy code also addressed the interests of creditors by protecting their interests in a bankruptcy company’s debts. It used to be that whichever creditor filed a lawsuit first would recover their debts. Today, all creditors are given equal footing when attempting to recover a debt. 

The purpose of our modern bankruptcy law is to protect the interests of debtors and creditors and the economy at large. Discharging unpayable debt is preferable to incurring the costs related to imprisoning someone for not repaying a debt. Giving each creditor a fair chance to file a claim on a bankrupt individual’s estate is preferable to leaving most creditors out in the cold. 

Talk to an Indiana Bankruptcy Attorney Today

Chris Arrington represents the interests of debtors who are so deep in debt that they cannot repay their creditors. Call our office today to schedule a free consultation and learn more about how we can help. 

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