Did you know that bankruptcy was included in the United States Constitution? In Article 1, Section 8, the founding fathers gave Congress the authority to “uniform laws on the subject of bankruptcies throughout the United States.” Though Congress attempted several times throughout the 1800s to enact several different bankruptcy laws, there was no long term success until the Bankruptcy Act of 1898 was passed.
Congress desired to uniform and federalize bankruptcy laws across the country because of the wide variation of bankruptcy laws existing within the states. Congress felt that placing bankruptcy under the federal government’s control would lead to uniformity among the states, encouraging interstate commerce and promoting the country’s economic development.
Stemming from a depression which began in 1793, Congress passed the first federal bankruptcy law in 1800. This law was short lived and was repealed three years later. Congress again took up the task of passing its second bankruptcy law in 1841 during the Panic of 1837, a recession that lasted for almost seven years resulting in collapsed banks, failed businesses and extremely high unemployment.
The Bankruptcy Act of 1841 lasted only two years. Congress’ third attempt at bankruptcy law came about after the Civil War with the passing of the Bankruptcy Act of 1867. This act was amended in 1874 and later repealed in 1878. The Bankruptcy Act of 1898 met the demand for permanency in bankruptcy law and created bankruptcy courts and trustees, which were given the responsibility of overseeing bankruptcy liquidations and financial reorganizations. The 1898 act and its many amendments lasted for eighty years and became the model for current bankruptcy laws in the United States. This act stayed in effect until the Bankruptcy Reform Act of 1978 was passed, which along with many of its amendments, is referred to as the Bankruptcy Code.