Bankruptcy in the United States: A Brief History

While bankruptcy laws have been amended numerous times in our country’s history, their primary purpose has never wavered: to allow individuals and businesses to eliminate or reorganize accumulated debt.

The Bankruptcy Act of 1800

In 1800, Congress passed the first federal law relating to bankruptcy, fittingly called the Bankruptcy Act of 1800.

This act:

  • Only allowed merchants to file for involuntary bankruptcy
  • Did not allow individuals to file on their own
  • Became easily corrupted and the law was appealed just three years later.

After this act was repealed, states continued to run various bankruptcy systems without the help of the federal government.

The Bankruptcy Act of 1841

Following the financial panic of 1837, congress passed another bankruptcy law that took the power away from creditors and allowed individuals to file their own voluntary bankruptcies.

This act:

  • Allowed debtors to file for bankruptcy and receive a discharge of debt.
  • Included individuals as eligible to file for bankruptcy instead of just merchants.
  • Was repealed in 1843 when it was decided that too much debt was being forgiven and too little was providing payments to creditors.

The Bankruptcy Act of 1867

Because of the U.S. Civil War, Congress decided to try again and passed the Bankruptcy Act of 1867. This act was very detailed and covered many situations.

This act:

  • Allowed involuntary bankruptcies for any individual, not just merchants.
  • Required that the U.S. District Courts appoint bankruptcy judges
  • Failed in 1978 due to similar criticisms.

The Bankruptcy Act of 1898

Not until 1898 did Congress finally establish a bankruptcy system that endured. This act remained essentially unchanged for almost 100 years.

This act:

  • Gave companies an option of being protected by creditors
  • Established bankruptcy courts
  • Created the position of referee in bankruptcy

The Reform Act of 1978

After several amendments to the 1898 law, congress passed the Reform Act of 1978. This act made comprehensive changes to the bankruptcy system.

This act:

  • Increased the scope of the power of bankruptcy judges
  • Strengthened chapter 13 bankruptcy
  • Helped earners repay and discharge their debts more efficiently

2005 Bankruptcy Code Amendments

Although not a complete act, the 2005 Bankruptcy Code Amendments created a means test for Chapter 7 bankruptcy, which limits Chapter 7 to people with limited income.

To learn more about the bankruptcy process, contact Sam Henry Law today for a free initial consultation.