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A Brief History of Bankruptcy

The American judicial system is based on English common law and a lot of trial and error. The first bankruptcy laws in England were passed under King Henry VIII (the one with all the ex-wives) in 1542. These laws bore no resemblance to our modern laws. An unpaid debt could only be discharged with a criminal penalty. Debtors’ prisons and even death were enforceable penalties for failure to pay.

It was not until the 1700’s that we had a modern-style bankruptcy system that allowed debtors to pay off what they could afford to pay off while discharging the remainder of the debt. 

Bankruptcy in the United States: 1800 – 1900

In the U.S., we have a history of reacting to unfavorable economic conditions with federal bankruptcy legislation and then promptly repealing the legislation after those conditions were ameliorated. In 1800, we passed bankruptcy statutes in response to poor land speculation deals and then repealed the provisions in 1803. A second bankruptcy law was passed in 1841 amid widespread economic panic and then repealed again in 1843. Then there was the Civil War which spurred a bankruptcy law in 1867. That law was repealed in 1878 but contained language allowing corporations to file for bankruptcy.

These were not voluntary bankruptcies. An individual had to be forced into bankruptcy by a lender and the government. The rules heavily favored investors over consumers. Involuntary filings are relatively rare in today’s economy. 

1898 to Present

1898 is the first example of modern bankruptcy legislation that focused on protecting borrowers from lenders. As it turns out, driving people into bankruptcy is not good for the economy. Modern approaches (beginning in 1898) emphasized rehabilitating debts by reorganizing them. But it was not until the Great Depression that the intent of bankruptcy law was established: To help honest (but unfortunate) debtors get a fresh start. 

The upheaval created by the Great Depression led to the Chandler Act of 1938. The effort was an attempt to protect businesses from lenders. The general idea was to place customers over the needs of lenders.

In 1979, the modern foundation of our bankruptcy law was passed called The Bankruptcy Reform Act of 1978. This act solidified business bankruptcies filed under Chapter 11 and added a new form of personal bankruptcy known as Chapter 13. The updates made it easier for both businesses and individuals to file for bankruptcy. 

The Lesson

Investor-centric approaches to debt law harmed the economy in various ways, reducing hiring, limited goods available to the public, and incentivized investors forcing businesses into bankruptcy as a type of hostile takeover. Today, protecting consumers from lenders is considered an important part of a healthy economy. Borrower-side protections have improved the situation for lenders, consumers, and workers, as opposed to unilaterally favoring investors in these transactions. The balance of these interests is what makes up the American economy.

Talk to an Indiana Bankruptcy Attorney Today

Chris Arrington provides bankruptcy counsel for those who are being harassed by creditors or too deep in debt to escape the interest spiral. Call today to schedule a free consultation and we can begin discussing your options immediately.

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