U.S. Bankruptcy Laws Took Very Long to Get Off the Ground
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 State of America started its existence without a national bankruptcy law, and in fact without the ability to have one. The Continental Congress established the United States with its founding constitution consisting of the “Articles of Confederation and Perpetual Union,” drafted in 1776-1777. Not ratified by the 13 states until 1781, the Articles of Confederation did not provide for a nationwide bankruptcy system.
The American Revolutionary War ended in 1782, the U.S. Constitution was drafted in 1787 and was ratified by the states in 1789. It did allow for, yet did not of itself create a national bankruptcy law. It merely empowered Congress to “pass uniform laws on the subject of bankruptcies”.
The Constitution may have thus empowered Congress, but Congress did not do a very good job at this for nearly half our nation’s history. 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 But these federal laws were each repealed after the financial crises were over.
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 passed the Bankruptcy Act of 1898. This is the first one that was not quickly repealed, and lasted 80 years.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 that 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.