The United States Constitution gives Congress the power to establish laws on the subject of Bankruptcy throughout the United States. Congress first exercised this power the Bankruptcy Act of 1800. This act, which virtually copied the existing English law, provided for involuntary bankruptcies and was only available to traders (merchants). The act was repealed three years later in 1803. Two more short-lived federal bankruptcy laws were enacted from 1841 to 1843 and from 1867 to 1878. A permanent federal bankruptcy law would not go into effect until 1898. Therefore, states were free to make their own bankruptcy laws without federal restriction for the vast majority of the first hundred years after the constitution was ratified.
The Bankruptcy Act of 1898 marks the origins of bankruptcy law legislation in the United States. Unlike many prior laws in England and America, the Act provided for both voluntary and involuntary bankruptcies. Furthermore, the Act allowed debtors a discharge for most kinds of debt. Voluntary bankruptcy was allowed for everyone, not just traders.
Although the Bankruptcy Act signaled the beginning of the most liberal debtor treatment in United States history, much of the law was directed not at debtor relief, but at facilitating the distribution of the debtor’s property to creditors. Amendments were made to the Act after the Great Depression set in that made the law friendlier to debtors. In 1938, the Chandler Act was passed which organized the bankruptcy code into the various Chapters (for example, Chapter 7 or Chapter 13) that are still in existence today.
The Bankruptcy Reform Act of 1978 was the first comprehensive reform of bankruptcy law since the Chander Act of 1938 and established the Bankruptcy Code which is still in use today. Under this reform, bankruptcy judges were granted broader jurisdiction and greater use of Chapter 13 bankruptcies, known as wage-earner bankruptcies, was encouraged.
In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act was made into law. This Act made substantial changes to existing bankruptcy law including the requirement that debtors obtain credit counseling in the 180 days before filing bankruptcy and the requirement that Chapter 7 debtors qualify under the “means test.” If you are considering filing a bankruptcy seek experienced counsel to advise you of your options under the new law.