An Abridged History of Bankruptcy in the United States

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Where did it all begin?

How far back do you want to go?

For starters, the word “Bankruptcy” comes from two Latin words: bancus, meaning “bench” or “table,” and ruptus, meaning “broken.” In ancient times, bankers and lenders would work from a bench in the public marketplace. When they ran out of money, their bench was broken in order to show that they were failures at handling money.

Luckily, modern bankruptcy laws are far kinder, but it did take us a while to get here.

In the US, bankruptcy is as old as the nation, with the power to establish bankruptcy laws granted to Congress by the Constitution itself. The first such example came in 1800, when Congress passed the aptly named Bankruptcy Act of 1800. This law allowed creditors to declare bankruptcy upon their debtors, and it only applied to merchants (not individuals). But, like they say in Jurassic Park, life finds a way and before too long, merchants were finding ways to sweet-talk (read: bribe) creditors into declaring bankruptcy upon them to alleviate their debts. Because of this rampant abuse, the law was repealed after only three years.

1841 saw massive reform when Congress tried to enact new laws in the form of the Bankruptcy Act of 1841. This was historic because it allowed individuals to file bankruptcy to discharge debts, as well as merchants. While very favorable to debtors, creditors successfully lobbied Congress to repeal the law after only two years because they claimed it discharged too much debt and provided too little in payments to creditors.

Bankruptcy law gets a little cloudy at this point, with the Bankruptcy Act of 1867 and the Bankruptcy Act of 1898. The act of 1867 lasted until 1978, which makes it the longest-lasting bankruptcy law in the US, but the act of 1898 is typically credited as the first permanent piece of bankruptcy legislation (even though it, too, was radically altered in 1978).

The 1867 law is important because it required courts to appoint “registers” to perform the necessary duties to declare a bankruptcy. These registers would then go on to become the first bankruptcy judges, which we still have today.

The act of 1898 was important because it gave companies the ability to protect themselves from creditors; an important caveat we still enjoy today.

Finally, we reach the Bankruptcy Reform Act of 1978 – a monumental piece of legislation that was, at the time, the best balance of power granted to both debtors and creditors. It allowed creditors to recoup some of their losses, but it also allowed the debtors to keep much of their existing property, and all future earnings.

While the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added further provisions to bankruptcy law, the core tenets of who can file, and how, have remained the same for nearly 40 years. Even though the laws and provisions have changed, the purpose of bankruptcy has remained the same: to protect hard-working Americans and help them regain control of their financial lives.

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