History of Bankruptcy Laws in the U.S.

The notion of being insolvent or being bankrupt dates back numerous centuries. In Ancient Greece, where bankruptcy did not exist, if a man owed a debt and he could not pay, he and his wife, children or servants were forced into “debt slavery,” until the creditor recouped losses via their physical labour.

In the Old Testament, every seventh year is decreed by Mosaic Law as a Sabbatical year, wherein the release of all debts that are owed by members of the community is mandated. The seventh Sabbatical year, or forty-ninth year, is then followed by another Sabbatical year known as the Year of Jubilee, wherein the release of all debts is mandated for fellow community members and foreigners alike, and the release of all debt-slaves is also mandated.

In more modern England, the first legislation governing bankruptcy was the Bankruptcy Act of 1542. Under this Act, insolvent individuals were viewed as crooks, and the Act itself stated that it was aimed to prevent “crafty debtors” from escaping the realm. A more humane approach was developed in the Bankruptcy Act of 1705, which allowed the Lord Chancellor to discharge debtors, once disclosure of all assets and various procedueres had been fullfilled.

In the U.S., prior to 1898, there were several short-lived laws that governed bankruptcy. The first U.S. bankruptcy law was the Act of 1800. This law was repealed in 1803 and followed by the Act of 1841, which itself was repealed in 1843. Then came the Act of 1867, which was amended in 1874 and repealed in 1878.

Congress consolidated U.S. federal bankruptcy law in the Bankruptcy Act of 1898, also known as the “Nelson Act.” See Act of July 1, 1898, c. 541, 30 Stat. 544. At that time, U.S. bankruptcy laws only facilitated the liquidation of a debtor’s assets. Not until 1933, did Congress amend the Nelson Act to permit the reorganization of certain entities. See Pub. L. No. 72-420, 47 Stat. 1474 (1933). In 1938, through enactment of the “Chandler Act,” Congress amended the existing Bankruptcy Act with the precursor to chapter 11 to facilitate general corporate reorganizations. See Act of June 22, 1938, Pub. L. No. 74-575, 52 Stat 840 (1938).

In 1978, Congress substantially revised the bankruptcy laws, through the enactment of the Bankruptcy Reform Act of 1978. The Bankruptcy Reform Act created the modern “Bankruptcy Code,” which is codified in Title 11 of the United States Code.

Since 1978, the Bankruptcy Code has been amended several times. In 1984, the Code was amended after the U.S. Supreme Court decided the case of Northern Pipeline Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982), wherein the Court held that certain provisions granting powers to Article I bankruptcy judges (as opposed to Article III federal district court judges) were unconstitutional. After the 1984 Act, bankruptcy judges in each judicial district constitute a unite of the applicable U.S. District Court. The bankruptcy judges also are appointed for a term of 14 years.

The Code was amended slightly in 1994, among other things, to cure some perceived gaps in corporate bankruptcies.

The most recent amendment to the Code came through the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which primarily was aimed at curbing consumer abuses of the bankruptcy system. BAPCPA also included certain reforms to chapter 11 reorganizations, aimed at curing perceived corporate abuses that occured in some noted cases in 2001 and 2002 (e.g., Enron). BAPCPA further added chapter 15 to govern ancillary U.S. proceedings of foreign debtors who hold U.S. debts and are involved in insolvency proceedings in foreign countries.

The largest bankruptcy in U.S. History occured on September 15, 2008, when Lehman Brothers Holdings Inc. filed for chapter 11 protection, listing more than $639 billion in assets. Lehman recently concluded its 4 year bankruptcy.