Early Bankruptcy in the United States

The Bankruptcy statute is a federal law that allows individuals and businesses to eliminate and reallocate financial debts they are unable to pay within the original terms of the agreed upon loan or credit. The concept of debt settlement and bankruptcy has existed throughout ancient history. Those that have, giving to have nots, with the hope that they are repaid for what they gave and then some. Many religious texts give suggestions on how to deal with the insolvency of their fellow man. In most cases, these texts advocated for leniency & flexibility so as not to inflict excess hardship. In pre-modern times, Bankruptcy was seen as a heinous and gravely punishable offense. The first piece of legislation on bankruptcy dates back to Renaissance England, in the Statute of Bankruptcy in 1542. It was established as a way to ensnare debtors that were looking to criminally evade their debts. It was not uncommon for these debtors to be placed in jail until their debts were answered for. In colonial America, the framers of the Constitution foresaw the need to account for bankruptcy. In Article 1, Section 8 of our Constitution, Congress was granted the power to, “establish uniform laws on the subject of bankruptcies throughout the United States”, though it would be more than a decade after the Constitution’s ratification that a federal program would be established. In the absence of a national system, states took it upon themselves to develop individualized systems; which were very favorable to creditors and were such a hazard to debtors, that they could find themselves in debtor’s prison for even the most meager of debts.

The Evolution of Bankruptcy in America

A series of trial and error statutes had to be tested before a national standard could be met. The Bankruptcy Act of 1800 was the first of these trials. It was written in favor of creditors and allowed only bankruptcies to be filed by merchant debtors, not private citizens on their own behalf. It limited federal exemptions to basic necessities, such as the apparel of the debtor and necessary beds and bedding. Outside of that, the law was not very supportive of the debtor. The law was repealed no more than three years later due to filing loopholes and debtor abuse. Then came the Bankruptcy Act of 1841; an act that was more reasonable in its exemptions and considerate of debtors. It allowed for some modest exemptions including furniture and clothing as well as other pertinent items deemed necessities that did not exceed a value of $300. It marked the first time that an individual could file their own bankruptcy. This was a landmark tenet because it was the first time that a person could claim their own debts in good faith and have them resolved. This law had some issues because creditors were receiving too few payments and debtors were given too much leniency. The law was repealed not even two years later.

Modern Bankruptcy Law

It wasn’t until the passage of the 1898 law that, after a series of major configurations, that the first comprehensive nationwide bankruptcy law would find a permanent role as a functional law in our society. This was a turning point in bankruptcy law as it removed overarching federal exemptions and allowed for states to plug and play their own exemptions as they deemed fit. Several amendments to the 1898 act were made to morph the bill into the Bankruptcy Reform Act of 1978. This act set a precedent as the face of our economy was changing and the world as it was known was turning into something closer to what we recognize today. The 1978 act existed for more than 25 years before its alteration with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The most comprehensive Bankruptcy law to date, it addressed an array of drawbacks and pitfalls that affected the realm of Bankruptcy in its history. This act established a means test to determine whether a debtor was qualified for Chapter 7 or Chapter 13 debt relief. It has given debtors and creditors a reliable standard for debt relief as it represents an even-handed approach to the interests of both creditors and debtors.

Contact the Arizona Bankruptcy Team at the Zolman Law

Historically, bankruptcy has existed by numerous definitions. Whether it be tenant farmers owing produce to landowners, or a newly minted homeowner struggling to make payments on their home, bankruptcy is an inevitable side effect of our system. Here at the Zolman Law in Mesa, Arizona we can help eliminate or restructure these debts and help give you a fresh start.