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A Brief History of U.S. Bankruptcy Law

United States bankruptcy law has a long history, dating back to the Constitution era. While these early bankruptcy laws were modeled on English law, modern bankruptcy laws wildly differ from their legal predecessors.

Early American Bankruptcy Laws

The first law on the subject of bankruptcy was the Bankruptcy Act of 1800, which was limited to traders and only affected involuntary bankruptcies. This law was repealed in 1803 after creditors frequently forced their debtors into bankruptcy. Other acts were passed concerning bankruptcy throughout the 1800's, but these acts failed by being either too lenient or too harsh on debtors.

The Bankruptcy Act of 1898 gave companies the option of protection from their creditors. This later act is what created the concept of debtor-creditor relations as they are known in modern law.

The next major bankruptcy act, the Bankruptcy Act of 1938, created the option of voluntary bankruptcy. This meant that companies would be able to declare themselves bankrupt and reorganize their leadership in order to maximize profits. This also gave rise to the Securities and Exchange Commission, an organization meant to regulate the stock market and protect investors in businesses in the event that a business declared bankruptcy or committed fraud.

Bankruptcy Reform Act of 1979

One of the most significant actions that shaped the modern climate of bankruptcy law was the establishment of the Bankruptcy Reform Act of 1979, which replaced the Bankruptcy Act of 1898.

The Bankruptcy Reform Act of 1979 was a huge overhaul of the bankruptcy system and created:

  • Chapter 7 bankruptcy, which allows a debtor liquidate and discharge their debts
  • Chapter 11 bankruptcy, which allows businesses to reorganize their debts
  • Chapter 13 bankruptcy, which is for personal and business debt reorganization
  • Reduced the size and powers of bankruptcy court

Since the beginning of United States history, there has been a need for bankruptcy laws to protect both debtors and creditors. As a result of the 1979 Act, other acts have come and gone throughout the system with the primary purpose of eliminating debts and allowing American consumers to restart their financial lives. However, the 1979 bankruptcy act set the modern standard for bankruptcy law in America.

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