The History of Bankruptcy Law
Bankruptcy law in the United States has had a very long and difficult history. The authority of congress to pass laws regarding bankruptcy was first set forth by the constitution. Article I, Section 8 of the US Constitution states, “The Congress shall have power… To establish a uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.” The first law to fulfill this mandate was the Bankruptcy Act of 1800. It only lasted three years and mainly applied to traders.
After forty years of no active bankruptcy law being on the books, a new law named the Bankruptcy Act of 1841 was passed. This act proved to be very unpopular and was in fact repealed in only a year. Congress didn’t pass a bankruptcy law again until the Bankruptcy Act of 1867. The law was created through a political compromise, and it was the first law to grant the right to states to create their own exemptions. This law again, however, was a deemed a failure. It was quickly amended by the Bankruptcy Act of 1874. This law was once again very short lived and was repealed in 1878 due to unpopularity.
These long series of failed laws in the 1800’s may have seemed like an exercise in futility. However, the laws at least provided a series of legal cases that made it to the Supreme Court that would help shape some of the boundaries of future bankruptcy legislation that was to come.
Finally, the first bankruptcy law that would survive to create a lasting impact was passed with the Bankruptcy Law of 1898. The law was nick named the “Nelson Act” due to the strong involvement of Senator Knute Nelson. This law was important since it gave businesses the option of having protection from creditors. Even more significant, though, was the Chandler Act that was enacted in 1938. This was the law that first granted power to the Securities and Exchange Commission to administrate filings for bankruptcy.
Out of this long history of failed laws, partially successful laws, and Supreme Court decisions came the first modern bankruptcy law to shape US bankruptcy as we know it today. This law was the Bankruptcy Reform Act of 1978. The law took nearly seven years to hammer out, but when it was finally passed, it came to represent the major framework of US bankruptcy law that lives on today. One of the biggest changes was a complete reorganization of the “chapters” of bankruptcy that included the creation of a new kind of bankruptcy filing, “Chapter 13.” Chapter 13 allows individuals with disposable income to restructure their debts in a way that would allow them to repay creditors in a period of at least five years. Other significant changes included things like allowing a husband and wife to joint file for bankruptcy, upgrading the jurisdictions of bankruptcy filings, changing the bankruptcy appeal process, and adding more federal exemptions for debtors.
Bankruptcy law has continued to evolve since 1978 with a number of new laws that amended the bankruptcy code. For example, the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has made it more difficult for certain individuals to file for Chapter 7 bankruptcy.
