Bankruptcy actually goes back to Bible days. (Remember the part about debts being forgiven in the Sabbatical year and the Jubilee year?)
When the U.S. Constitution was written in 1776, it included a provision for bankruptcy. In 1800, Congress passed the country’s first bankruptcy law, which applied only to businesses. That law was repealed in 1803. Then, in 1841, a new federal law was enacted that applied to both businesses and individuals. It, too, was repealed two years later. A third version was enacted in 1867, and it lasted 11 years before being killed by creditors’ protests. In 1998, Congress passed a fourth bankruptcy law that became the foundation for our laws today. The basic ideas embodied in that law were protecting debtors from collection activities, and allowing a “reorganization” of debt.
Changes to bankruptcy law were hardly over. There were laws passed in 1938, 1978, and 1994. Each was later repealed. The very latest version of the law, adopted in 2005, was the Bankruptcy Abuse Prevention and Consumer Protection Act. This new law established a “Means Test” for debtors, and put into place the limits on collection activities I talked about in my earlier blog, What Can’t Debt Collectors Do?.
Over the decades, the bankruptcy legal system, as you can see, has gone through quite a number of changes and adaptations. In an effort to keep our capitalistic society running smoothly, it’s important to provide a safety net for citizens who have fallen on hard times and who need a fresh start. Some bankruptcy filers are entrepreneurs who have taken an honest risk in establishing a business and were then overwhelmed by forces beyond their control in the economy. At the same time, unless the creditors’ rights are protected by the law, lenders will not be willing to take the risk of providing loans to those entrepreneurs or extending credit to consumers.
The process of creating bankruptcy laws that are fair to all parties is a balancing act at best, but as I well know (having helped write the exemption portion of the most recent Indiana bankruptcy laws), many good people, over a period of many, many years, have devoted their best efforts to the task.