The Amazing but True Evolution of Bankruptcy Law

You’ve heard of debtors’ prisons. But that’s only one hideous part of the very colorful history of bankruptcy law.

American bankruptcy law was of course based on the law of England at the time of the colonies. Today’s blog tells how incredibly different pre-Revolutionary War bankruptcy laws were from current law.

  • The first bankruptcy law in England was enacted more than 450 years ago during the reign of Henry the Eighth, the one who had a habit of decapitating his former wives. Debtors were called “offenders” under this first law, essentially as perpetrators of a property crime.  The purpose of this law, and as if was expanded during the following hundred and fifty years, was not to give relief to debtors but rather to give creditors a more effective way to collect on the debts owed by their debtors.
  • Consistent with that, the law included no discharge of debts. After a bankruptcy was finished—with the assets of the “offender” seized and sold and distributed to creditors—separate creditors could still continue chasing the individual for any remaining balance.
  • Only creditors could start a bankruptcy proceeding. Creditors had to allege an “act of bankruptcy” by the debtor. Physically hiding from creditors was “an act of bankruptcy,” as was hiding assets by conveying them to others. Today’s very seldom used “involuntary bankruptcy” is a throwback to this.
  • Since credit was seen as immoral, only merchants were allowed to use credit, for whom it was seen as a necessary evil. So only merchants could become bankrupt.
  • For the following century and a half, Parliament made the law even stronger for creditors, allowing bankruptcy “commissioners” to break into the homes of “offenders” for their assets, put them into pillories (those wooden structures with holes for head and hands used for public shaming), and even cut off their ears.
  • The discharge of debts was finally introduced in the early 1700s for cooperative debtors, but was given only upon consent of the creditors. Furthermore, to induce cooperation, fraudulent debtors were subject to the death penalty (although it was very seldom used).
  • Cooperative debtors received an allowance from their own assets, a bit of a foreshadowing of Chapter 13 payment plans.

This was the English bankruptcy law in effect that the U.S. Constitution was adopted, with its Bankruptcy Clause giving Congress power to “pass uniform laws on the subject of bankruptcies.” More on that and the very rocky history of U.S. bankruptcy laws in my next blog.