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A History of Bankruptcy Laws

Bankruptcy laws existed as long ago as the Roman Empire. However, the laws that govern bankruptcy in the United States are derived from British statutes that date back to the 16th century.

Originally, bankruptcy was a crime initiated by creditors, which often led to imprisonment.

In pre-Revolutionary times the first 13 American colonies revised the bankruptcy laws with some sympathetic changes. For example, debtors had the option to retain certain assets. However, bankruptcy laws varied from colony to colony to an enormous extent.

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A Federal System is Born

The U.S. Constitution tried to make bankruptcy laws more uniform, and gave Congress the power to create bankruptcy legislation.

By the late 1800s, the United States had standardized laws that focused mostly on the liquidation process, replacing a system where people with severe financial issues could only turn to a disorganized mixture of state insolvency procedures dating back to colonial days.

Over time both federal and state bankruptcy laws evolved into a way to protect debtors rather than punish them.

The most significant change was that individuals could discharge severe debt with a creditor's approval. Furthermore, prison sentences were reserved for only the most grievous cases such as fraud.

The Bankruptcy Act of 1898

In 1898 Congress passed a bankruptcy act that lasted for 80 years. This law acknowledged what was called the "credit economy" of the Industrial Age and allowed for a much broader discharge of debts.

The 1898 Act also made a number of key additions to bankruptcy laws. Most importantly, the act introduced having an officer of the district courts involved in the proceedings. This would become the predecessor of today's bankruptcy trustee. The 1898 Act also expanded the law to permit businesses in financial crisis to take advantage of the bankruptcy process.

In 1938, this act was modified further to give publicly and privately held businesses the ability to reorganize themselves instead of liquidating their assets. Additionally, the officer of the court was given more power to guide individuals and businesses in financial distress.

Modern Bankruptcy Laws

In 1978 the set of laws went through another significant revision, making it the backbone of today’s bankruptcy rules. The 1978 Act defined the bankruptcy chapters more clearly, increased jurisdiction to bankruptcy judges and legitimized bankruptcy filing more than ever before.

Amendments and revisions to bankruptcy laws have been made over the years since the Bankruptcy Reform Act of 1978. But this act revolutionized the Bankruptcy Code, allowing it to be more of a financial reorganization tool for debtors and businesses alike.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, currently the latest revision to the bankruptcy code, is based on the 1978 laws, but introduced a means test for filing Chapter 7 as well as credit counseling and debtor education courses for all filers.

The history of bankruptcy laws shows an evolution to helping individuals and families get a fresh financial start.

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