A brief history of bankruptcy in the United States.

By Alfred Villoch, III, with Savage, Combs & Villoch, PLLC
Contrary to pop culture belief, bankruptcy existed long before the game show Wheel of Fortune.  Remember when contestants would lose their prize money if they spun the wheel and randomly landed on the ominous black wedge, “BANKRUPTCY”?  Bankruptcy also existed way before celebrities like M.C. Hammer, Billy Joel, Burt Reynolds, and Mike Tyson each filed for bankruptcy protection. P.T. Barnum, a famous American showman and businessman, filed bankruptcy in 1877.  K-Mart filed bankruptcy in 2002.
Bankruptcy in the United States dates back to the United States Constitution itself. Article I, Section 8 of the U.S. Constitution gives Congress the power to enact uniform laws on the subject of bankruptcies. Although Congress had this power beginning in 1787, Congress did not pass a bankruptcy law until about 13 years later in 1800 and, even then, the law passed was short lived and was limited to involuntary bankruptcy proceedings brought against merchant and traders. In 1803, Congress repealed the Bankruptcy Act of 1800, citing excessive costs and corruption.
Without federal bankruptcy laws in place, debtors were at the mercy of their home state laws, if the laws provided them with any relief at all.  Once a debtor owed a debt, the debt dogged the debtor forever unless paid off. Also, debtors were unable to get rid of debts from other states because one state did not necessarily have jurisdiction (or power) to discharge a debt originating in another state.  In colonial America, if you did not pay your debts, you were often times sent to debtor’s prison. And up until 1839, debtors could still be imprisoned for not paying their debts!
In 1841 and then 1867, Congress passed new bankruptcy laws, but they suffered the same short lived fate as as the Bankruptcy Act of 1800.  However, in each new attempt, bankruptcy law began to evolve, improve, and become the foundation for modern day bankruptcy law. For instance, in 1841, Congress began to allow voluntary cases, allow discharge of debtors who turn over their assets, and provide for the recovery of fraudulent and preferential transfers.  In 1867, U.S. Districts Courts were recognized as having original jurisdiction over bankruptcy matters and corporations are finally recognized as debtors who can file bankruptcy.
1898 brought the first long-term bankruptcy law passed by Congress.  It remained in effect for almost 80 years.  This 1898 law called for “referees,” who were the predecessors to current bankruptcy judges. The law also created the Office of the United States Trustee.  The Chandler Act of 1938 further created what are now known as chapters for separate types of bankruptcy, including a chapter for business reorganizations and a chapter for wage earners.
Fast forward to the Bankruptcy Reform Act of 1978, which aside from 2005 reforms, is essentially the bankruptcy laws as we know them to date.  This Act established bankruptcy courts in each district and provided for separate bankruptcy judges, who are appointed by the President and confirmed by the Senate.  The Act also provided for new chapters 11 and 13 and makes it easier for businesses and individuals to receive discharge from their debts in bankruptcy.  In 1986, Congress added chapter 12, which provides special bankruptcy relief to family farmers.
In 2005, the most recent overhaul to bankruptcy took place and it was significant.  Entitled the “Bankruptcy Abuse Prevention and Consumer Protection Act,” the 1978 laws were reformed to establish a “means test” where debtors must specifically qualify for chapter 7 bankruptcy; otherwise, their cases are dismissed or converted to chapter 13 plans.  The reform also made credit counseling a condition for completing bankruptcy, among a few other things.
Bankruptcy law has come a long way since 1800 where it was involuntary and aimed at merchant traders.  Society has similarly come a long way since debtor’s prisons and refusing to allow a fresh start for the honest, but unfortunate debtor.  No longer is bankruptcy as stigmatizing as it once was and is now seen as a tool to refresh and shed oppressive debt in order to improve and contribute once again to the economy.  If you have any questions about whether bankruptcy is right for you, please contact Alfred Villoch, III, at Savage, Combs & Villoch, PLLC.  The telephone number is 813-200-0013 or click www.savagelaw.us today!