Bankruptcy

Congress has enacted a number of major federal bankruptcy laws, beginning with one in 1800 that generally copied the contemporaneous bankruptcy laws of England. Imprisonment for failure to repay a DEBT was standard procedure in England from the thirteenth century until around the time of Charles Dickens (1812–70), who wrote of the grim conditions of the poor and insolvent debtors and whose own father had been sent to the Marshalsea Debtors’ prison in 1824. The word bankruptcy is derived from medieval Italian city-states’ practice of literally breaking the bench of a merchant or a banker who had run off, leaving unpaid creditors. In the United States, imprisonment of debtors was abolished at the federal level in 1833 and in many states a few years later.

Although the need for uniform bankruptcy laws was behind the constitutional provision, state laws remained generally unfettered except for federal laws in effect during the periods 1800–1803, 1841–43, and 1867–78. The first permanent law was the Bankruptcy Act (1898), which remained in force, albeit with numerous amendments, until it was replaced by the Bankruptcy Reform Act [Page 61] (1978). In brief, bankruptcy laws allow bankrupt debtors, including legal entities such as businesses, to discharge (cancel) their debts at less than 100 percent on the dollar and begin anew, generally free of their former debts. Federal bankruptcy laws are found in Title 11 of the U.S. Code. Chapter 7 sets forth procedures for individual and corporate debtors whose assets are to be liquidated. Chapter 11 provides primarily for corporate reorganization or restructuring short of liquidation, while chapter 13 details an alternative bankruptcy procedure for individuals with regular income.

...