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A Brief History of United States Bankruptcy Law

March 25th, 2022

United States bankruptcy law has a storied history almost as rich as the history of the United States in general. In fact, in many instances, the two histories have been inextricably intertwined.

Going back to the founding of the republic, bankruptcy was something that could result in some sort of punishment. However, temporary laws were occasionally enacted to help alleviate the burden of corporate and individual insolvency, particularly during economic downturns, most notably the Civil War. These bankruptcy protections were eventually repealed as economic conditions improved.

The first attempt at a long-lasting bankruptcy law-referred to occasionally as “The Nelson Act”-was passed in 1898. This statute created the first permanent protections to commercial debtors undergoing bankruptcy. Unfortunately, individual bankruptcy protection remained elusive for most people.

Bankruptcy protection remained in a bureaucratic netherworld until the Great Depression wreaked havoc on the United States economy through the 1930s. During that incredibly dark era bankruptcy and poverty were a way of life for about 1/3 of the population. Bankruptcy Code was substantially revisited to provide debtors with more legal protections, although some states fought back against such revisions because they were seen as “too friendly” to debtors.

As the United States embarked on military intervention into World War II, further expansive bankruptcy considerations were set aside as the nation focused its domestic agenda on winning the war abroad.

Following World War II, as the United States demobilized, the troops came home to an economic landscape that had been transformed by years of war into an economic powerhouse. This lead to unprecedented prosperity for millions of Americans who had known nothing but poverty during the Great Depression. Therefore, expansions of the Bankruptcy Code were minimal for the next three decades.

It wasn’t until the Bankruptcy Reform Act of 1978 that the United States embarked on a comprehensive effort to replace “The Nelson Act” bankruptcy code enacted in 1898.

The Bankruptcy Reform Act of 1978, not coincidentally, came about during another drawn-out economic downturn as bankruptcy again became a haunting specter in American life.

The Bankruptcy Reform Act of 1978 remains the general framework around which the modern day Bankruptcy Code is built. It includes the most familiar “chapters” of bankruptcy law of which most people are familiar, such as Chapter 7, Chapter 11 and Chapter 13.