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Understanding Bankruptcy

Early Bankruptcy Law
in the United States

For a long time, bankruptcy in Europe and in North America has been considered so important as to be placed under federal jurisdiction. In the United States, for instance, even though individual states are allowed to make their own bankruptcy rules, they must be based on federal law.

In the U.S., the power of the federal government to establish and regulate bankruptcy is granted by the U.S. Constitution, which was written in 1787 and went into effect in 1789. Specifically: Article 1, Section 8, Clause 4 mandates that Congress shall have power to establish "uniform laws on the subject of bankruptcies throughout the United States".

In Canada, similar powers were given to the federal government by the British North America Act of 1867. Two years later, the Canadian government passed the first bankruptcy law, the Insolvent Act of 1869. In England, modern bankruptcy dates from the same time, with the Debtor's Act of 1869.

In the United States, although constitutional authority was established in 1789, it took 11 years for the first American bankruptcy law to be passed, the BANKRUPTCY ACT OF 1800, which was modeled after the British laws in effect at the time. (As I mentioned above, one of the prime motivations for this law was to provide a way to release Robert Morris from debtor's prison.)

The Bankruptcy Act of 1800 made it possible, for the first time, for U.S. citizens to be declared legally insolvent. However, this right lasted only three years, as the law was repealed in 1803. The reason was that, at first, all U.S. bankruptcy laws were temporary. They were passed only in response to dire financial conditions, and were repealed once the economy recovered.

Here are the highlights:

1800: Bankruptcy was introduced in the United States in response to the Panic of 1796-1797 (a severe recession). This law was biased in favor of creditors and applied only to individuals, not to companies.

1803: The Bankruptcy Act of 1800 was repealed after only three years.

1841: A second bankruptcy law was passed in response to another recession, the Panic of 1837.

1843: The Bankruptcy Act of 1841 was repealed after only two years.

1867: A third bankruptcy law was passed in the aftermath of the financial chaos caused by the Civil War. For the first time, bankruptcy protection was extended to companies as well as individuals.

1878: The Bankruptcy Act of 1867 was repealed after 11 years.

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