The History of Bankruptcy
The idea that people ought to get their debts forgiven periodically is very old. Thousands of years old to estimate. It predates biblical times and is even in the bible.
In ancient Greece, thousands of years BC / BCE, if you could not pay your debts you would become a debt-slave. But even then, as a debt slave you had protection of life and limb, a privilege not afforded to regular slaves. Also, it was customary to release the debt slaves after five years. This five-year range has stuck throughout history.
In Deuteronomy 15:1-2, the Bible says “At the end of every seven years you shall grant a release of debts. And this is the form of the release: Every creditor who has lent anything to his neighbor shall release it; he shall not require it of his neighbor or his brother, because it is called the Lord’s release“.
Luke 7:42, the Bible says, “When they were unable to repay, he graciously forgave them both”
Since then, some civilizations have given people a way to get relief from their debts. Other civilizations have created debtor prisons, where you get locked up or enslaved indefinitely if you can’t pay your debts.
In the United States, the idea of giving people a bankruptcy option goes all the way back to our nation’s founding. Article I, section 8 of the Unites States Constitution gives Congress the power to “Establish Uniform Laws on the subject of Bankruptcies throughout the United States.” But even though the US Congress had the ‘power‘ to establish bankruptcy laws, the power was not used for years.
In the 1800s there were State bankruptcy laws, and they were not friendly to the people who owed money. In fact, there were debtor prisons right here in our country! If you did not pay a debt, you were going to jail!
Thankfully in the 1830s, Federal law established that debtor’s prisons were to be abolished. Individuals were first permitted to file voluntary bankruptcy for the first time after 1841. The Bankruptcy Act of 1841 gave them this right. Progress was being made! But sadly, as is so often the case, we made one step forward and two steps back. Today in 2018 we hear a lot of talk about banks and big businesses influencing government policy in their favor. This is probably the single worst part of our nation. Well it is nothing new. This pattern of powerful people influencing government was alive and well in the 1840s. Only three years after the bankruptcy act of 1941 was passed, the banks convinced the US congress to repeal it. How about that? Now the personal bankruptcy option was dead, just in its infancy.
Over 20 years later, The Bankruptcy Act of 1867 was passed. For 20 years our bankruptcy system evolved and there were even “Registers” who were the earliest bankruptcy judges.
But the banks did not like borrowers having such power. The banks again rallied congress and the act was repealed in in 1888. Well, at least this time bankruptcy protection lasted for about 20 years.
In 1898, ten years after the last act was repealed, we got our first permanent bankruptcy act. This act created the infrastructure of the bankruptcy system that exists today. It lasted in various forms for about 80 years until 1978.
From the 70’s to Modern Times
In 1978 we got the bankruptcy code, the detailed legal framework that tells us who can file bankruptcy, when they can file, and what stuff they can protect. That 1978 code didn’t have a massive revision until 2005. The code wasn’t repealed gain, but I bet you can guess what happened. The banks had a friendly president (friendly to the banks, that is) in George Bush Jr. They rallied a conservative congress to take away a lot of rights of ordinary people to file bankruptcy. I have to point out that though the Bush administration famously claimed to be ‘Christian’ – the policies were contrary to biblical teaching. For instance, bankruptcy laws in the US were always modeled after biblical standards of releasing people from debt every SEVEN years. But under Bush, the new act made people wait EIGHT years. Not very nice! The new 2005 law limited what could be eliminated in bankruptcy. It also imposed expensive and time-consuming hurtles such as the credit counseling requirement (biggest nonsensical waste of everyone’s time ever, but it has to be done now). Bankruptcy wasn’t repealed, but those banks sure did succeed in getting congress to make it hard for people to get relief.
And that is where we are today. The 2005 law with some basic revisions and changes is still what controls bankruptcy options in the US. After years of practice we have figured out just how to maximize options within this new legal framework. There are a lot of websites and people that say bankruptcy is not possible any more, but that is false. I have overseen the filing of many thousands of cases since 2005 and we have never had a client lose a home or a car or even any cash. In fact, we have probably aided in the discharge (elimination) of almost one billion dollars of debt!
Bankruptcy is alive and well in the United States today, and thank goodness for that. I would not want to live in a society that made slaves and prisoners out of people who fell on hard times. In fact, I would say that bankruptcy protection is one of the great signs of civility and humanity in our legal framework. It is sad that so many millions of people don’t understand their bankruptcy options and still slave away for years only to pay high interest rates to predatory lenders. Hopefully, as people get better information they will make better use of this fantastic right in our great nation.