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Everything You’ve Ever Wanted to Know About the History of Bankruptcy in the United States

On Behalf of | May 1, 2017 | Education |

Our country has permitted individuals who have not been able to pay their debts to file for bankruptcy from our origin. At the time, the United States was a devoutly Christian nation, and historians trace the origins of our bankruptcy laws back to the year of Jubilee, found in the Old Testament. See Leviticus 25: 1-4, 8-10. At the time of our founding, each of the original colonies had their own bankruptcy law, but ten years after the adoption of the Constitution, a uniform federal bankruptcy law was adopted, which lasted only three years. Early versions of the law were decided pro-creditor, even permitting imprisonment for debts.

The Bankruptcy Act of 1800 – The first law permitted only the filing of involuntary bankruptcies, which meant that the debtor’s creditors could initiate the petition. In most instances, the debtor would induce a friendly creditor to file the petition. The system proved to be unworkable, become rife with corruption and was repealed three years later.

The Bankruptcy Act of 1841 – The country endured a financial panic in 1837, wherein many banks failed. The 1841 act had many of the ingredients of present bankruptcy law. Debtors were permitted to file voluntary petitions, the filing of a petition discharged most debts, and the federal courts were given jurisdiction to preside over and administer this law. Unlike the 1800 act, the 1841 act was pro-debtor, and political strength of the lending class was wielded. The statute was repealed two years later.

The Bankruptcy Act of 1867 – The 1867 Act survived 20 years, as the nation and Congress were not able to reach a consensus as to whether merchants and ordinary people should be permitted to discharge their debts. Involuntary petitions were available to the creditors for both merchants and non-merchant debtors. This act was the most elaborate plan. The notion that an individual could discharge all of their debts was still controversial, and the act was repealed 20 years later.

The Bankruptcy Act of 1898 – The act passed in 1898 marked the first statute that survived, and the country has always had a bankruptcy code since that date. The act contemplated that most petitions would be voluntarily filed by the debtor. The act established a bankruptcy court, which was a separate court but still a part of the federal court system. A fairly elaborate scheme was passed that provided that, while most debts, could be discharged, many could not. Debts that were predicated on fraudulent actions were the most frequent type of debts that were not subject to a discharge.

The Reform of 1978 – The last major reform occurred in 1978. The basic plan was the same in that most consumer debtors had the right to file a chapter 7, liquidation, or a chapter 13, which call for payments over time. The scope of debts that were not subject to discharge was expanded, and the bankruptcy courts were given extended powers. While the bankruptcy code has been amended several times, the basic scheme has remained. The most significant amendment came in 2005, when the “means test” was adopted requiring wealthier debtors to file a chapter 13. The means test deprived some debtors of the ability to file a chapter 7, requiring payments to a chapter 13 trustee before a discharge would be granted.

What’s in store for the future? If you’re having financial issues trust Bankruptcy Advocates to provide you with a free consultation to give you sound advice on how to manage your debt. Our attorneys’ first duty is to you. In many instances, we have been able to recommend a strategy that permits the client to deal with their debts without having to file. We can help you determine if you need to file for bankruptcy and can help you gain control of your life again. Call us today at (618) 549-9800 to get started.

Southern Illinois Bankruptcy Attorney law firm Bankruptcy Advocates is located in Carbondale and serves a wide geographic community. The first consultation is always free. Give us a call at 618-549-9800 or email us at [email protected]  to speak about your case or legal matter. Convenient appointment times are available.