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A Quick History of Bankruptcy in America

Three signs marked past, present, and future.
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  • Jill
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  • July 9, 2019

A Quick History of Bankruptcy in America

Chapter 7 bankruptcy and bankruptcy, in general, have never been, and never will be, cut and dry. Even in the early 1800s when the government started writing bankruptcy laws, they hit quite a few snags. 

Article 1, section 8 of the U.S. Constitution included the first mention of this kind of law. The founding fathers outlined the idea of a uniform law for bankruptcy across the entire United States. However, that was only as far as it went. 

The History of Chapter 7 Bankruptcy and More

Bankruptcy Act of 1800

In 1800 the first act was written. This act was not intended for individuals themselves to file for bankruptcy. At the time, involuntary bankruptcy for merchants was the only option. This meaning, merchants that were owed money would request for individuals to file due to lack of payment. The Bankruptcy Act of 1800 was soon repealed because of suspicions that merchants were doing friends a favor by initiating the request. 

Act of 1841

In 1841 congress tried again, writing the Bankruptcy Act of 1841. This time individuals were able to file themselves. Individuals were now able to have all liability of debt removed without the risk of the debtor taking any action. This was otherwise known as the debt being discharged. Among other details outlined in the act, the U.S. District courts were now in charge of deciding who would have their debt discharged. Just like forty years earlier, the act had its flaws. Congress decided that too many people were having their debt discharged and debtors were not collecting enough money. The act was repealed in 1843.

Act of 1867

Trying yet again, after the Civil War, Congress wrote the Bankruptcy Act of 1867. Involuntary bankruptcy was now an option for not just merchants but individuals as well. This was the first act to appoint specific judges to bankruptcy cases. In 1888 this act too fell short and was repealed.

The Final Act

The next act, the Bankruptcy Act of 1898, wasn’t written for another 10 years. Although the act was amended and replaced it was not repealed, making it the first permanent bankruptcy act. 

Another act was not written until 1978 when the Bankruptcy Reform Act came into play.

Under this act the power of bankruptcy judges was increased and “Bankruptcy Code” was introduced. After years of studying, along with trial and error, the 1978 act was altered to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). Under the prevention and protection act came the means test. 

The means test provides guidelines on whether an individual can file for chapter 7 bankruptcy. To file chapter 7 bankruptcy an individual’s income, expenses, and family size are all analyzed. If it is determined that an individual does not have enough income to repay their debt they then “pass” the means test and can file for chapter 7 bankruptcy. However, if it is determined that the individual has too much income, and can repay their debt, their best bet is to look into filing for chapter 13 bankruptcy.  

As well as the means test, credit counseling is also required under the Bankruptcy Abuse Prevention and Consumer Protection Act. Counseling is to be completed before filing and must be court approved. To make it easy to find approved counseling, the U.S. Department of Justice’s website lays out, by state, approved agencies.

Barifay Law Offices

Filing for bankruptcy is still very confusing for most people. It is highly suggested not to try filing for any chapter on your own. At Bartifay Law Offices, we specialize in helping individuals and companies file.        

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