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The History of Bankruptcy

In ancient times, relief from debt was unknown. The exception was within the Old Testament nation of Israel in which, every seventh year, debts were absolved regardless of the amount (Deut. 15). Until the last century, in most every culture, an indebted individual faced enslavement, often for life, or imprisonment until the debt was paid. The Continent of Australia and the British Colony of Georgia (later to become the U.S. State of Georgia) were even organized to operate as debtor prisons.

History of BankruptcyIn the U.S., a number of bankruptcy laws were enacted during times of economic upheaval, such as the Civil War, then subsequently repealed throughout the 19th century but the Great Depression in the 20th century wrought significant changes to bankruptcy law. Prior to the 1930’s, bankruptcy laws tended to favor the creditor and punish the debtor. The Bankruptcy Act of 1898 however, was the first to provide distressed companies optional protection from creditors, known as equity receivership, through which the company could be reorganized (rehabilitated). During the Great Depression, bankruptcy laws were elaborated upon with the Bankruptcy Act of 1933 and the Bankruptcy Act of 1934, the latter providing the debtor “a new opportunity in life…. unhampered by the pressure and discouragement of preexisting debt.” Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S. Ct. 695, 675 (1934).

The Bankruptcy Reform Act of 1978 provided for strong provisions for business reorganization with Chapter 11 and revising Chapter 13 with more powerful provisions. The results made filing bankruptcy and reorganizing easier for both businesses and individuals, and created the Bankruptcy Code. The Supreme Court ruled the Act of 1978 gave bankruptcy judges too much power which could be used to overreach into other government jurisdictions. This brought about the Bankruptcy Amendment Act of 1984. Shortly after, Chapter 12 came into existence to provide for the needs of farmers facing bankruptcy, allowing them the opportunity to reorganize their debts and maintain possession of the family farm.

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA) was signed into law in 2005 making significant changes to the bankruptcy code in general. This bill required debtors with the ability – those found to fail the Means Test, typically formulated as individuals who exceed their state’s median income, while reducing the income for certain attributed and estimated continuing house hold expenditures – to repay some portion of their debts. The law also created an eight-year waiting period between bankruptcy filings to prevent repeat abusers from benefitting from bankruptcy protections. Further, it mandates that individual filers must undergo credit counseling prior to filing for relief under the Bankruptcy Code and receive financial management education after filing for relief under the Bankruptcy Code.

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