The Origins of Modern Day Bankruptcy Law

Article 1, Section 8, Clause 4 of the United States Constitution provides:

“The Congress shall have Power To… establish… uniform Laws on the subject of Bankruptcies throughout the United States… ”

This authority granted under the United States Constitution enabled the Congress of the United States to establish Bankruptcy Courts and establish uniform Bankruptcy Laws.

The origin of United States Bankruptcy laws dates back to sixteenth century English Law. Famously, Debtor’s prison was the norm at that time. In fact, in 1705, the English Parliament drafted a Bill making the bankrupt’s refusal to cooperate a capital offense.

Society utilized a system of coercion to incentivize borrowers to repay their debts. But coercing debtors to be honest and cooperate with divergent creditor interests proved a failure, instead incentivizing fraud amongst debtors seeking avoidance of harsh penalty.

Attitudes eventually changed overtime upon practical realization punishment and imprisonment of debtors was of little benefit to creditors, and upon understanding better results would occur for both Debtor and Creditor in protecting Debtor’s assets and income streams to maximize payoff of creditors’ claims.

Thus, beginning in the eighteenth century, bankruptcy laws began evolving, recognizing the social benefit in protecting debtors and their assets, permitting debt discharge as a reward for debtor cooperation assisting towards reducing claims of creditors. Modern day bankruptcy was born.

The United States Constitution granted Congress power to establish uniform federal bankruptcy laws in 1789 and the first Bankruptcy Act adopted by congress was enacted in 1800. Initially, the emphasis was creditor relief over debtor protection. Debtor voluntary bankruptcy filings were not permitted. The early statutory schematic was an offspring of the early bankruptcy laws of England, where harsh penalties and punishment of debtors who sought to avoid financial responsibilities was the primary premise behind this legislation.

But the a philosophical debate began over whether bankruptcy laws should be designed to protect the debtor or the creditor, eventually enabling modern society to recognize the symbiotic relationship between debtor and creditor and the need to protect debtors to maximize payout for creditors. The passage of the Bankruptcy Act of 1841 offered debtors greater protections and permitted voluntary filings for relief; and the Bankruptcy Act of 1898 established bankruptcy courts and provided for bankruptcy trustees providing an even playing field for debtors to protect their assets and income from ad hoc creditor collection action, enabling preservation and enhancement of the debtors estate assets so creditors could receive a higher repayment.

Public sentiment also began evolving towards debtors. Beginning in the eighteenth century changing attitudes inspired development of the concept of debt discharge where Courts nullified debts as a reward for debtor cooperation in trying to reduce them. The public viewpoint also realized most circumstances befell upon debtors were beyond the debtor’s control – unexpected dramatic market movements, illnesses, crop failures, etc. Public sentiment began viewing the debtor’s plight with greater sympathy, as well as recognizing imprisonment and punishment was useless to the unsatisfied creditor. Thus, it was recognized encouraging resolution of monetary obligations through a forum of bankruptcy protection worked towards the greater good of society.

Societal benefit is also achieved enabling debtors overburdened with debt to achieve a fresh start. The Bankruptcy Code enables Debtors to retain basic economic needs protecting homesteads, tools of the trade, and other basic essentials, while at the same time permitting discharge of indebtedness.

Permitted a fresh economic start, debtors can re-enter the workforce with a strong economic footing strengthened through lifting of burdensome debt caused by past economic failure.

The author of this article is an expert in all bankruptcy matters. Mr. Stern practices law in Rochester, New York where he is a senior partner at law firm of Elliott Stern Calabrese, LLP. For further insights on bankruptcy issues feel free to visit Mr. Stern’s Bankruptcy Website located at http://www.rochesternybankruptcylawyer.com/index.html

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