History of bankruptcy law in the United States
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The history of bankruptcy law in the United States refers primarily to a series of acts of
Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of a ...
regarding the nature of
bankruptcy Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
. As the legal regime for
bankruptcy in the United States In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution (Article 1, Section 8, Clause 4) authorizes Congress to enact "uniform Laws on the sub ...
developed, it moved from a system which viewed bankruptcy as a quasi-criminal act, to one focused on solving and repaying debts for people and businesses suffering heavy losses.


Pre-Independence

In the
Thirteen Colonies The Thirteen Colonies, also known as the Thirteen British Colonies, the Thirteen American Colonies, or later as the United Colonies, were a group of Kingdom of Great Britain, British Colony, colonies on the Atlantic coast of North America. Fo ...
, laws regarding the payment and collection of debt were based on
English common law English law is the common law legal system of England and Wales, comprising mainly criminal law and civil law, each branch having its own courts and procedures. Principal elements of English law Although the common law has, historically, bee ...
. Debtors who were unable to repay their debts had property confiscated and assigned to the creditor, or were imprisoned.


Eighteenth and nineteenth centuries

Upon the ratification of the
United States Constitution The Constitution of the United States is the Supremacy Clause, supreme law of the United States, United States of America. It superseded the Articles of Confederation, the nation's first constitution, in 1789. Originally comprising seven ar ...
in 1789, Congress was given the power under Article I, Section 8, Clause 4 to legislate for "uniform laws on the subject of Bankruptcies" throughout the United States. Congress' first law on the subject was the
Bankruptcy Act of 1800 The Bankruptcy Act of 1800 was the first piece of federal legislation in the United States surrounding bankruptcy. The act was passed in response to a decade of periodic financial crises and commercial failures. It was modeled after English practi ...
, which was limited to traders and provided only for involuntary proceedings. This was repealed in 1803. Diplomatist Edmund Roberts, President
Andrew Jackson Andrew Jackson (March 15, 1767 – June 8, 1845) was an American lawyer, planter, general, and statesman who served as the seventh president of the United States from 1829 to 1837. Before being elected to the presidency, he gained fame as ...
's envoy to the
Far East The ''Far East'' was a European term to refer to the geographical regions that includes East and Southeast Asia as well as the Russian Far East to a lesser extent. South Asia is sometimes also included for economic and cultural reasons. The ter ...
, incorporated American concepts of bankruptcy protection into Article VI of the Roberts Treaty with Siam of 1833. Voluntary bankruptcy in the United States was first allowed by the Acts of 1841, and 1867. These early acts and the
Bankruptcy Act of 1898 The Bankruptcy Act of 1898 ("Nelson Act", July 1, 1898, ch. 541, ) was the first United States Act of Congress involving bankruptcy to give companies an option of being protected from creditors. Previous attempts at federal bankruptcy laws had ...
, known as the Nelson Act,Act of July 1, 1898, ch. 541, 30 Stat. 544. established the modern concepts of debtor-creditor relations.


Twentieth century

The
Bankruptcy Act of 1938 The Bankruptcy Act of 1938, also known as the Chandler Act, expanded voluntary access to the bankruptcy system in the United States and made voluntary petitions more attractive to debtors. It also gave authority to the Securities and Exchange Co ...
, known as the Chandler Act expanded voluntary access to the bankruptcy system, and voluntary petitions were made more attractive to debtors. The Chandler Act gave authority to the
Securities and Exchange Commission The U.S. Securities and Exchange Commission (SEC) is an independent agency of the United States federal government, created in the aftermath of the Wall Street Crash of 1929. The primary purpose of the SEC is to enforce the law against market ...
in the administration of bankruptcy filings. The
Bankruptcy Reform Act of 1978 The Bankruptcy Reform Act of 1978 (, , November 6, 1978) is a United States Act of Congress regulating bankruptcy. The current Bankruptcy Code was enacted in 1978 by § 101 of the Act which generally became effective on October 1, 1979. The curre ...
, commonly referred to as the Bankruptcy Code, constituted a major overhaul of the bankruptcy system. First, it covered cases filed after October 1, 1979. Second, the 1978 Act contained four titles. Title I was the amended Title 11 of the U.S. Code. Title II contained amendments to Title 28 of the U.S. Code and the Federal Rules of Evidence. Title III made the necessary changes in other federal legislation affected by the bankruptcy law changes. Title IV provided for the repeal of pre-Code bankruptcy, the effective dates of portions of the new law, necessary savings provisions, interim housekeeping details, and the
pilot program A pilot study, pilot project, pilot test, or pilot experiment is a small-scale preliminary study conducted to evaluate feasibility, duration, cost, adverse events, and improve upon the study design prior to performance of a full-scale research pr ...
of the United States trustee. Perhaps the most important changes to bankruptcy law under the 1978 Act, however, were to the courts themselves. The 1978 Act drastically altered the structure of the bankruptcy courts and conferred pervasive subject matter
jurisdiction Jurisdiction (from Latin 'law' + 'declaration') is the legal term for the legal authority granted to a legal entity to enact justice. In federations like the United States, areas of jurisdiction apply to local, state, and federal levels. Jur ...
upon the courts. The act granted the new jurisdiction over all "civil proceedings arising under title 11 or arising in or related to cases under title 11." 28 U.S.C. §1471(b) (1976 ed. Supp.) While the new courts were denominated adjuncts of the district court, they were in practice free standing courts. The expanded jurisdiction was to be exercised primarily by bankruptcy judges. The bankruptcy judge would continue to be an Article I judge, who was appointed for a set term. The provisions of the 1978 Act came under scrutiny in the case of ''
Northern Pipeline Co. v. Marathon Pipe Line Co. ''Northern Pipeline Construction Company v. Marathon Pipe Line Company'', 458 U.S. 50 (1982), is a United States Supreme Court case in which the Court held that Article III jurisdiction could not be conferred on non-Article III courts (i.e. cour ...
'', 458 U.S. 50, 102 S. Ct. 2858, 73 L. Ed.2d 598 C.B.C.2d 785(1982). The Court held unconstitutional the broad grant of jurisdiction to bankruptcy judges because those judges were not appointed under and protected by the provisions of Article III of the Constitution. Under the United States Constitution, the Article III judges hold their offices during good behavior (an appointment for life), and their
salary A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis. ...
cannot be reduced during their tenure in office. Article I judges do not enjoy such rights. The jurisdictional challenge started when a creditor filed an
adversary proceeding An adversary proceeding in bankruptcy is a type of lawsuit in the American legal system. It is distinguished from other suits by being filed a United States bankruptcy court in connection with a larger bankruptcy proceeding. Procedure Adversary p ...
in
bankruptcy court United States bankruptcy courts are courts created under Article I of the United States Constitution. The current system of bankruptcy courts was created by the United States Congress in 1978, effective April 1, 1984. United States bankruptcy c ...
, which covered issues such as
breach of contract Breach of contract is a legal cause of action and a type of civil wrong, in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party ...
,
warranty In contract law, a warranty is a promise which is not a condition of the contract or an innominate term: (1) it is a term "not going to the root of the contract",Hogg M. (2011). ''Promises and Contract Law: Comparative Perspectives''p. 48 Cambrid ...
, and
misrepresentation In common law jurisdictions, a misrepresentation is a false or misleading '' R v Kylsant'' 931/ref> statement of fact made during negotiations by one party to another, the statement then inducing that other party to enter into a contract. The ...
. The bankruptcy court denied the
defendant In court proceedings, a defendant is a person or object who is the party either accused of committing a crime in criminal prosecution or against whom some type of civil relief is being sought in a civil case. Terminology varies from one jurisdic ...
's
motion to dismiss In United States law, a motion is a procedural device to bring a limited, contested issue before a court for decision. It is a request to the judge (or judges) to make a decision about the case. Motions may be made at any point in administrati ...
, and the defendant appealed to the district court. The district court held that 28 U.S.C. §1471 violated Article III of the Constitution because it delegated Article III powers to a non-Article III court by its broad grant of jurisdiction to the bankruptcy courts. In a
plurality opinion A plurality opinion is in certain legal systems the opinion from one or more judges or justices of an appellate court which provides the rationale for the disposition of an appeal when no single opinion received the support of a majority of th ...
, the Supreme Court held that the broad grant of jurisdiction accorded bankruptcy courts by 28 U.S.C. '1471 was an unconstitutional delegation of Article III powers to a non-Article III court. Similarly, Section 241(a) of the Bankruptcy Reform Act of 1978, by establishing the jurisdictional provisions set forth in 28 U.S.C. '1471 was held unconstitutional. The Court stayed its judgment until October 4, 1982, to give "Congress an opportunity to reconstitute the bankruptcy courts or to adopt other valid means of adjudication, without impairing the interim administration of the bankruptcy laws." Id. 458 U.S. at 89. After the stay had expired, Congress still failed to act. Instead, a model "
emergency rule A state of emergency is a situation in which a government is empowered to be able to put through policies that it would normally not be permitted to do, for the safety and protection of its citizens. A government can declare such a state du ...
" was adopted as a local rule by the district courts. The purpose of the rule was to avoid the collapse of the bankruptcy system, and it was a temporary measure to provide for the orderly administration of bankruptcy cases and proceedings after Marathon. The rule remained in effect until enactment of the 1984 legislation on July 10, 1984. Although the
constitutionality Constitutionality is said to be the condition of acting in accordance with an applicable constitution; "Webster On Line" the status of a law, a procedure, or an act's accordance with the laws or set forth in the applicable constitution. When l ...
of the "emergency rule" was under constant attack, the Supreme Court consistently denied
certiorari In law, ''certiorari'' is a court process to seek judicial review of a decision of a lower court or government agency. ''Certiorari'' comes from the name of an English prerogative writ, issued by a superior court to direct that the record of ...
. The effects of the 1978 Act on grain elevator bankruptcies were unpopular, leading to Wayne Cryts' protest. In 1984, Congress implemented a "permanent" legislative solution to the issues addressed in ''Marathon'' by enacting the
Bankruptcy Amendments and Federal Judgeship Act of 1984 Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor ...
. By this act, with few exceptions, such as the trial of personal injury and wrongful death claims and matters that require consideration of both Title 11 and organizations or activities affecting
interstate commerce The Commerce Clause describes an enumerated power listed in the United States Constitution ( Article I, Section 8, Clause 3). The clause states that the United States Congress shall have power "to regulate Commerce with foreign Nations, and amo ...
, the new bankruptcy courts were allowed to exercise all of the subject matter jurisdiction of the district courts. Thus, bankruptcy courts were allowed to hear cases such as ''Marathon''. The Act of 1984 in many ways resembled the Bankruptcy Act of 1898. Among other things, the law provided for the re-designation of separate units for bankruptcy judges under the district court system. Bankruptcy cases pending on or filed after July 10, 1984, are subject to most of the
amendments An amendment is a formal or official change made to a law, contract, constitution, or other legal document. It is based on the verb to amend, which means to change for better. Amendments can add, remove, or update parts of these agreements. The ...
relating to bankruptcy jurisdiction. The Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 made substantive changes relating to
family farm A family farm is generally understood to be a farm owned and/or operated by a family; it is sometimes considered to be an Estate (land), estate passed down by inheritance. Although a recurring conceptual model, conceptual and archetype, archet ...
ers and established a permanent United States trustee system. The 1986 Act applies to cases filed since November 26, 1986. The Bankruptcy Reform Act of 1994 is effective as to cases filed on or after October 22, 1994. The reform act and the
case law Case law, also used interchangeably with common law, is law that is based on precedents, that is the judicial decisions from previous cases, rather than law based on constitutions, statutes, or regulations. Case law uses the detailed facts of a l ...
interpreting its provisions have a great impact upon the
mortgage bank Mortgage bank is a bank that specializes in originating and/or servicing mortgage loans. In the United States, a mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers. The difference between a mortgage b ...
ing industry and the servicers of
mortgage loan A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...
s.


Twenty-first century

*
Bankruptcy Abuse Prevention and Consumer Protection Act The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) () is a legislative act that made several significant changes to the United States Bankruptcy Code. Referred to colloquially as the "New Bankruptcy Law", the Act of Co ...
of 2005.


See also

*
UK insolvency law United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the ...
*
US corporate law United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance ...


Notes

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References

;Articles * JC Coffee, 'What went wrong? An initial inquiry into the causes of the 2008 financial crisis' (2009) 9(1) Journal of Corporate Law Studies 1 *L Levinthal, 'The Early History of Bankruptcy Law' (1918
66(5) University of Pennsylvania Law Review 223
*L Levinthal, 'The Early History of English Bankruptcy' (1919
67(1) University of Pennsylvania Law Review 1
*Noel, Francis Regis. (1919
A History of the Bankruptcy Law
C. H. Potter & Company. *I Treiman, 'Escaping the Creditor in the Middle Ages' (1927) 43
Law Quarterly Review The ''Law Quarterly Review'' is a peer-reviewed academic journal covering common law throughout the world. It was established in 1885 and is published by Sweet & Maxwell. It is one of the leading law journals in the United Kingdom. History The ...
230 ;Reports *Report of the Commission on Bankruptcy Laws of the United States, H.R. Doc. No. 93-137, 93d. Cong., 1st Sess., Part I (1973), reprinted in B Collier on Bankruptcy, App. Pt. 4-308 – 4-311 (15th rev. ed.) United States bankruptcy law Legal history of the United States History of bankruptcy law