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Bradley Hansen, Mary Washington College

Since 1996 over a million people a year have filed for bankruptcy in the United States. Most seek a discharge of debts in exchange for having their assets liquidated for the benefit of their creditors. The rest seek the assistance of bankruptcy courts in working out arrangements with their creditors. The law has not always been so kind to insolvent debtors. Throughout most of the nineteenth century there was no bankruptcy law in the United States, and most debtors found it impossible to receive a discharge from their debts. Early in the century debtors could have expected even harsher treatment, such as imprisonment for debt.

Table 1. Chronology of Bankruptcy Law in The United States, 1789-1978

Date Event
1789 The Constitution empowers Congress to enact uniform laws on the subject of bankruptcy.
1800 First bankruptcy law is enacted. The law allows only for involuntary bankruptcy of traders.
1803 First bankruptcy law is repealed amid complaints of excessive expenses and corruption.
1841 Second bankruptcy law is enacted in the wake of the Panics of 1837 and 1839. The law allows both voluntary and involuntary bankruptcy.
1843 1841 Bankruptcy Act is repealed, amid complaints about expenses and corruption.
1867 Prompted by demands arising from financial failures during the Panic of 1857 and the Civil War, Congress enacts the third bankruptcy law.
1874 The 1867 Bankruptcy Act is amended to allow for compositions.
1878 The 1867 Bankruptcy Law is repealed.
1881 The National Convention of Boards of Trade is formed to lobby for bankruptcy legislation.
1889 The National Convention of Representatives of Commercial Bodies is formed to lobby for bankruptcy legislation. The president of the Convention, Jay L. Torrey, drafts a bankruptcy bill.
1898 Congress passes a bankruptcy bill based on the Torrey bill.
1933-34 The 1898 Bankruptcy Act is amended to include railroad reorganization, corporate reorganization, and individual debtor arrangements.
1938 The Chandler Act amends the 1898 Bankruptcy Act, creating a menu of options for both business and non-business debtors.
1978 The 1898 Bankruptcy Act is replaced by The Bankruptcy Reform Act.

To say that there was no bankruptcy law in the United States for most of the nineteenth century is not to say that there were no laws governing insolvency or the collection of debts. Americans have always relied on credit and have always had laws governing the collection of debts. Debtor-creditor laws and their enforcement are important because they influence the supply and demand for credit. Laws that do not encourage the repayment of debts increase risk for creditors and reduce the supply of credit. On the other hand, laws that are too strict also have costs. Strict laws such as imprisonment for debt can discourage entrepreneurs from experimenting. Many of America’s most famous entrepreneurs, such as Henry Ford, failed at least once before making their fortunes.

Over the last two hundred years the United States has shifted from a legal regime that was primarily directed at the strict enforcement of debt contracts to one that provides numerous means to alter the terms of debt contracts. As the economy developed groups of people became convinced that strict enforcement of credit contracts was unfair, inefficient, contrary to the public interest, or simply not in their own self interest. Periodic financial crises in the nineteenth century generated demands for bankruptcy laws to discharge debts. They also led to the introduction of voluntary bankruptcy and the extension of the right to file for bankruptcy to all individuals. The expansion of interstate commerce in the late nineteenth century led to demands for a uniform and efficient bankruptcy law throughout the United States. The rise of railroads gave rise to a demand for corporate reorganization. The expansion of consumer credit in the twentieth century and the rise in consumer bankruptcy cases led to the introduction of arrangements into bankruptcy law, and continue to fuel demands for revision of bankruptcy law today.

Origins of American Bankruptcy Law

Like much of American law, the origins of both state laws for the collection of debt and federal bankruptcy law can be found in England. State laws are, in general, derived from common law procedures for the collection of debt. Under the common law a variety of procedures evolved to aid a creditor in collecting a debt. Generally, the creditor can obtain a judgment from a court for the amount that he is owed and then have a legal official seize some of the debtor’s property or wages to satisfy this judgement. In the past a defaulting debtor could also be placed in prison to coerce repayment. Bankruptcy law does not replace other collection laws but does supercede them. Creditors still use procedures such as garnishing a debtor’s wages, but if the debtor or another creditor files for bankruptcy such collection efforts are stopped.

Under the U.S. Constitution, adopted 1789, bankruptcy law became a federal law in the United States. There are two clauses of the Constitution that influenced the evolution of bankruptcy law. First, in Article One, Section Eight Congress was empowered to enact uniform laws on the subject of bankruptcy. Second, the Contract Clause prohibited states from passing laws that impair the obligation of contracts. Courts have generally interpreted these clauses so as to give wide latitude to the federal government to alter the obligations of debt contracts while restricting state governments. States, however, are not completely barred from altering the terms of contracts. In its 1827 decision on Ogden vs. Saunders the Supreme Court declared that states could pass laws that granted a discharge for debts that were incurred after the law was passed; however, a state discharge can not be binding on creditors who are citizens of other states.

The evolution of bankruptcy law in the United States can be divided into two periods. In the first period, which encompasses most of the nineteenth century, Congress enacted three laws in the wake of financial crises. In each case the law was repealed within a few years amid complaints of high costs and corruption. The second period begins in 1881 when associations of merchants and manufacturers banded together to form a national association to lobby for a federal bankruptcy law. In contrast to previous demands for bankruptcy law, which were prompted largely by crises, late nineteenth century demands for bankruptcy law were for a permanent law suited to the needs of a commercial nation. In 1898 the Act to Establish a Uniform System of Bankruptcy was enacted and the United States has had a bankruptcy law ever since.

The Temporary Bankruptcy Acts of 1800, 1841 and 1867

Congress first exercised its power to enact uniform laws on bankruptcy in 1800. The debates in the Annals of Congress are brief but suggest that the demand for the law arose from individuals who were in financial distress. The law was modeled after the English bankruptcy law of the time. The law applied only to traders. Creditors could file a bankruptcy petition against a debtor, the debtor’s assets would be divided on a pro rata basis among his creditors, and the debtor would receive a discharge. Although debtors could not file a voluntary bankruptcy petition, it was generally believed that many debtors asked a friendly creditor to petition them into the bankruptcy court so that they could obtain a discharge. The law was intended to remain in effect for five years. Complaints that the law was expensive to administer, that it was difficult and costly to travel to federal courts, and that the law provided opportunities for fraud led to its repeal after only two years. Similar complaints were to follow the passage of subsequent bankruptcy laws.

Bankruptcy law largely disappeared from national politics until the Panic of 1839. A few petitions and memorials were sent to Congress in the wake of the Panic of 1819, but no law was passed. The Panic of 1839 and the recession that followed it brought forward a flood of petitions and memorials for bankruptcy legislation. Memorials typically declared that many business people had been brought to ruin by economic conditions that were beyond their control not through any fault of their own. In the wake of the Panic, Whigs made the attack on Democratic economic policies and the passage of bankruptcy relief central parts of their platform. After gaining control of Congress and the Presidency, the Whigs pushed through the 1841 Bankruptcy Act. The law went into effect February 2, 1842.

Like its predecessor, the Bankruptcy Act of 1841 was short-lived. The law was repealed March 3, 1843. The rapid about-face on bankruptcy was the result of the collapse of a bargain between Northern and Southern Whigs. Democrats overwhelmingly opposed the passage of the Act and supported its repeal. Southern Whigs also generally opposed a federal bankruptcy law. Northern Whigs appear to have obtained the Southern Whigs votes for passage by agreeing to distribute the proceeds from the sales of federal lands to the states. A majority of Southern Whigs voted for passage but then reversed their votes the next year. Despite its short life, over 41,000 petitions for bankruptcy, most of them voluntary, were filed under the 1841 law.

The primary innovations of the Bankruptcy Act of 1841 were the introduction of voluntary bankruptcy and the widening of the scope of occupations that could use the law. With the introduction of voluntary bankruptcy, debtors no longer had to resort to the assistance of a friendly creditor. Unlike the previous law in which only traders could become bankrupts, under the 1841 Act traders, bankers, brokers, factors, underwriters, and marine insurers could be made involuntary bankrupts and any person could apply for voluntary bankruptcy.

After repeal of the Bankruptcy Act of 1841, the subject of bankruptcy again disappeared from congressional consideration until the Panic of 1857, when appeals for a bankruptcy law resurfaced. The financial distress caused to Northern merchants by the Civil War further fueled demands for bankruptcy legislation. Though demands for a bankruptcy law persisted throughout the War, considerable opposition also existed to passing a law before the War was over. In the first Congress after the end of the War, the Bankruptcy Act of 1867 was enacted. The 1867 Act was amended several times and lasted longer than its predecessors. An 1874 amendment added compositions to bankruptcy law for the first time. Under the composition provision a debtor could offer a plan to distribute his assets among his creditors to settle the case. Again, complaints of excessive fees and expenses led to the repeal of the Bankruptcy Act in 1878. Table 2 shows the number of petitions filed under the 1867 law between 1867 and 1872.

Table 2. Bankruptcy Petitions, 1867-1872

Year Petitions
1867 7,345
1868 29,539
1869 5,921
1870 4,301
1871 5,438
1872 6,074

Source: Expenses of Proceedings in Bankruptcy In United States Courts. Senate Executive Document 19 (43-1) 1580.

During the first three quarters of the nineteenth century the demand for bankruptcy legislation rose with financial panics and fell as they passed. Many people came to believe that the forces that brought people to insolvency were often beyond their control and that to give them a fresh start was not only fair but in the best interest of society. Burdened with debts they had no hope of paying they had no incentive to be productive, creditors would take anything they earned. Freed from these debts they could once again become productive members of society. The spread of the belief that debtors should not be subjected to the harshest elements of debt collection law can also be seen in numerous state laws enacted during the nineteenth century. Homestead and exemption laws declared property that creditors could not take. Stay and moratoria laws were passed during recessions to stall collection efforts. Over the course of the nineteenth century, states also abolished imprisonment for debt.

Demand For A Permanent Bankruptcy Law

The repeal of the 1867 Bankruptcy Act was followed almost immediately by a well-organized movement to obtain a new Bankruptcy law. A national campaign by merchants and manufacturers to obtain bankruptcy legislation began in 1881 when The New York Board of Trade and Transportation organized a National Convention of Boards of Trade.The participants at the Convention endorsed a bankruptcy bill prepared by John Lowell, a judge from Massachusetts. They continued to lobby for the bill throughout the 1880s.

After failing to obtain passage of the Lowell bill, associations of merchants and manufacturers met again in 1889. Under the name of The National Convention of Representatives of Commercial Bodies they held meetings in St. Louis and in Minneapolis. The president of the Convention, a lawyer and businessman named Jay Torrey, drafted a bill that the Convention lobbied for throughout the 1890s. The bill allowed both voluntary and involuntary petitions, though wage earners and farmers could not be made involuntary bankrupts. The bill was primarily directed at liquidation but did include a provision for composition. A composition had to be approved by a majority of creditors in both number and value. In a compromise with states’ rights advocates, the bill declared that exemptions would be determined by the states.

The merchants and manufacturers, who organized the conventions, provided credit to their customers whenever they delivered goods in advance of payment. They were troubled by three features of state debtor-creditor laws. First, the details of collection laws varied from state to state, forcing them to learn the laws in all the states in which they wished to sell goods. Second, many state laws discriminated against foreign creditors, that is, creditors who were not citizens of the state. Third, many of the state laws provided for a first-come, first-served distribution of assets rather than a pro rata division. With the first-come, first-served rule, the first creditor to go to court could claim all the assets necessary to pay his debts leaving the last to receive nothing. The first-come, first-served rule of collection tended to create incentives for creditors to race to be the first to file a claim. The effect of this rule was described by Jay Torrey: “If a creditor suspects his debtor is in financial trouble, he usually commences an attachment suit, and as a result the debtor is thrown into liquidation irrespective of whether he is solvent or insolvent. This course is ordinarily imperative because if he does not pursue that course some other creditor will.” Thus the law could actually precipitate business failures. As interstate commerce expanded in the late nineteenth century more merchants and manufacturers experienced these three problems

Merchants and manufacturers also found it easier to form a national organization in the late nineteenth century because of the growth of trade associations, boards of trade, chambers of commerce and other commercial organizations. By forming a national organization composed of businessmen’s associations from all over the country, merchants and manufacturers were able to act in unison in drafting a bankruptcy bill and lobbying for a bankruptcy bill. The bill they drafted not only provided uniformity and a pro rata distribution, but was designed to prevent the excessive fees and expenses that had been a major complaint against previous bankruptcy laws.

As early as 1884, the Republican Party supported the bankruptcy bills put forward by the merchants and manufacturers. A majority in both the Republican and Democratic parties supported bankruptcy legislation during the late nineteenth century. It took nearly twenty years to enact bankruptcy legislation because they supported different versions of bankruptcy law. The Democratic Party supported bills that were purely voluntary (creditors could not initiate proceedings) and temporary (the law would only remain in effect for a few years). The requirement that the law be temporary was crucial to Democrats because a vote for a permanent bankruptcy law would have been a vote for the expansion of federal power and against states’ rights, a central component of Democratic policy. Throughout the 1880s and 1890s, votes on bankruptcy split strictly along party lines. The majority of Republicans preferred the status quo to the Democrats bills and the majority of Democrats preferred the status quo to the Republican bills. Because control of Congress was split between the two parties for most of the last quarter of the nineteenth century neither side could force through their version of bankruptcy law. This period of divided government ended with the 55th Congress, in which the Bankruptcy Act of 1898 was passed.

Railroad Receivership and the Origins of Corporate Reorganization

The 1898 Bankruptcy Act was designed to aid creditors in liquidation of an insolvent debtor’s assets, but one of the important features of current bankruptcy law is the provision for reorganization of insolvent corporations. To find the origins of corporate reorganization one has to look outside the early evolution of bankruptcy law and look instead at the evolution of receiverships for insolvent railroads. A receiver is an individual appointed by a court to take control of some property, but courts in the nineteenth century developed this tool as a means to reorganize troubled railroads. The first reorganization through receivership occurred in 1846, when a Georgia court appointed a receiver over the insolvent Munroe Railway Co. and successfully reorganized it as the Macon and Western Railway. In the last two decades of the nineteenth century the number of receiverships increased dramatically; see Table 3. In theory, courts were supposed to appoint an indifferent party as receiver, and the receiver was merely to conserve the railroad while the best means to liquidate it was ascertained. In fact, judges routinely appointed the president, vice-president or other officers of the insolvent railway and assigned them the task of getting the railroad back on its feet. The object of the receivership was typically a sale of the railroad as a whole. But the sale was at least partly a fiction. The sole bidder was usually a committee of the bondholders using their bonds as payment. Thus the receivership involved a financial reorganization of the firm in which the bond and stock holders of the railroad traded in their old securities for new ones. The task of the reorganizers was to find a plan acceptable to the bondholders. For example, in the Wabash receivership of 1886, first mortgage bondholders ultimately agreed to exchange their 7 percent bonds for new ones of 5 percent. The sale resulted in the creation of a new railroad with the assets of the old. Often the transformation was simply a matter of changing “Railway” to “Railroad” in the name of the corporation. Throughout the late nineteenth and early twentieth centuries judges denied other corporations the right to reorganize through receivership. They emphasized that railroads were special because of their importance to the public.

Unlike the credit supplied by merchants and manufacturers, much of the debt of railroads was secured. For example, bondholders might have a mortgage that said they could claim a specific line of track if the railroad failed to make its bond payments. If a railroad became insolvent different groups of bondholders might claim different parts of the railroad. Such piecemeal liquidation of a business presented two problems in the case of railroads. First, many people believed that piecemeal liquidation would destroy much of the value of the assets. In his 1859 Treatise on the Law of Railways, Isaac Redfield explained that, “The railway, like a complicated machine, consists of a great number of parts, the combined action of which is necessary to produce revenue.” Second, railroads were regarded as quasi-public corporations. They were given subsidies and special privileges. Their charters often stated that their corporate status had been granted in exchange for service to the public. Courts were reluctant to treat railroads like other enterprises when they became insolvent and instead used receivership proceedings to make sure that the railroad continued to operate while its finances were reorganized.

Table 3. Railroad Receiverships, 1870-1897

Percentage of
Receiverships Mileage in Mileage put in
Year Established Receivership Receivership
1870 3 531 1
1871 4 644 1.07
1872 4 535 0.81
1873 10 1,357 1.93
1874 33 4,414 6.1
1875 43 7,340 9.91
1876 25 4,714 6.14
1877 33 3,090 3.91
1878 27 2,371 2.9
1879 12 1,102 1.27
1880 13 940 1.01
1881 5 110 0.11
1882 13 912 0.79
1883 12 2,041 1.68
1884 40 8,731 6.96
1885 44 7,523 5.86
1886 12 1,602 1.17
1887 10 1,114 0.74
1888 22 3,205 2.05
1889 24 3,784 2.35
1890 20 2,460 1.48
1891 29 2,017 1.18
1892 40 4,313 2.46
1893 132 27,570 15.51
1894 50 4,139 2.31
1895 32 3,227 1.78
1896 39 3,715 2.03
1897 21 1,536 0.83

Source: Swain, H. H. “Economic Aspects of Railroad Receivership.” Economic Studies 3, (1898): 53-161.

Depression Era Bankruptcy Reforms

Reorganization and bankruptcy were brought together by the amendments to the 1898 Bankruptcy Act during the Great Depression. By the late 1920s, a number of problems had become apparent with both the bankruptcy law and receivership. Table 4 shows the number of bankruptcy petitions filed each year since the law was enacted. The use of consumer credit expanded rapidly in the 1920s and so did wage earner bankruptcy cases. As Table 5 shows, voluntary bankruptcy by wage earners became an increasingly large proportion of bankruptcy petitions. Unlike mercantile bankruptcy cases, in many wage earner cases there were no assets. Expecting no return, many creditors paid little attention to bankruptcy cases and corruption spread in the bankruptcy courts. An investigation into bankruptcy in the southern district of New York recorded numerous abuses and led to the disbarment of of more than a dozen lawyers. In the wake of the investigation President Hoover appointed Thomas Thacher to investigate bankruptcy procedure in the United States. The Thacher Report recommended that an administrative staff be created to oversee bankruptcies. The bankruptcy administrators would be empowered to investigate bankrupts and reject requests for discharge. The report also suggested that many debtors could pay their debts if given an opportunity to work out an arrangement with their creditors. It suggested that procedures for the adjustment or extension of debts be added to the law. Corporate lawyers also identified three problems with the corporate receiverships. First, it was necessary to obtain an ancillary receivership in each federal district in which the corporation had assets. Second, some creditors might try to withhold their approval of a reorganization plan in exchange for a better deal for themselves. Third, judges were unwilling to apply reorganization through receivership to corporations other than railroads. Consequently, the Thacher report suggested that procedures for corporate reorganization also be incorporated into bankruptcy law.

Table 4. Bankruptcy Petitions Filed, 1899-1997

Petitions per Percentage
Year Voluntary Involuntary Total 10,000 Population Involuntary
1899 20,994 1,452 22,446 3.00 6.47
1900 20,128 1,810 21,938 2.88 8.25
1901 17,015 1,992 19,007 2.45 10.48
1902 16,374 2,108 18,482 2.33 11.41
1903 14,308 2,567 16,875 2.09 15.21
1904 13,784 3,298 17,082 2.08 19.31
1905 13,852 3,094 16,946 2.02 18.26
1906 10,526 2,446 12,972 1.52 18.86
1907 11,127 3,033 14,160 1.63 21.42
1908 13,109 4,709 17,818 2.01 26.43
1909 13,638 4,380 18,018 1.99 24.31
1910 14,059 3,994 18,053 1.95 22.12
1911 14,907 4,431 19,338 2.06 22.91
1912 15,313 4,432 19,745 2.07 22.45
1913 16,361 4,569 20,930 2.15 21.83
1914 17,924 5,035 22,959 2.32 21.93
1915 21,979 5,653 27,632 2.75 20.46
1916 23,027 4,341 27,368 2.68 15.86
1917 21,161 3,677 24,838 2.41 14.80
1918 17,261 3,124 20,385 1.98 15.32
1919 12,035 2,013 14,048 1.34 14.33
1920 11,333 2,225 13,558 1.27 16.41
1921 16,645 6,167 22,812 2.10 27.03
1922 28,879 9,286 38,165 3.47 24.33
1923 33,922 7,832 41,754 3.73 18.76
1924 36,977 6,542 43,519 3.81 15.03
1925 39,328 6,313 45,641 3.94 13.83
1926 40,962 5,412 46,374 3.95 11.67
1927 43,070 5,688 48,758 4.10 11.67
1928 47,136 5,928 53,064 4.40 11.17
1929 51,930 5,350 57,280 4.70 9.34
1930 57,299 5,546 62,845 5.11 8.82
1931 58,780 6,555 65,335 5.27 10.03
1932 62,475 7,574 70,049 5.61 10.81
1933 56,049 6,207 62,256 4.96 9.97
1934 58,888 4.66
1935 69,153 5.43
1936 60,624 4.73
1937 55,842 1,643 57,485 4.46 2.86
1938 55,137 2,169 57,306 4.41 3.78
1939 48,865 2,132 50,997 3.90 4.18
1940 43,902 1,752 45,654 3.46 3.84
1941 47,581 1,491 49,072 3.69 3.04
1942 44,366 1,295 45,661 3.41 2.84
1943 30,913 649 31,562 2.35 2.06
1944 17,629 277 17,906 1.35 1.55
1945 11,101 264 11,365 0.86 2.38
1946 8,293 268 8,561 0.61 3.13
1947 9,657 697 10,354 0.72 6.73
1948 13,546 1,029 14,575 1.00 7.06
1949 18,882 1,240 20,122 1.35 6.16
1950 25,263 1,369 26,632 1.76 5.14
1951 26,594 1,099 27,693 1.81 3.97
1952 25,890 1,059 26,949 1.73 3.93
1953 29,815 1,064 30,879 1.95 3.45
1954 41,335 1,398 42,733 2.65 3.27
1955 47,650 1,249 48,899 2.98 2.55
1956 50,655 1,240 51,895 3.10 2.39
1957 60,335 1,189 61,524 3.61 1.93
1958 76,048 1,413 77,461 4.47 1.82
1959 85,502 1,288 86,790 4.90 1.48
1960 94,414 1,296 95,710 5.43 1.35
1961 124,386 1,444 125,830 6.99 1.15
1962 122,499 1,382 123,881 6.77 1.12
1963 128,405 1,409 129,814 6.99 1.09
1964 141,828 1,339 143,167 7.60 0.94
1965 149,820 1,317 151,137 7.91 0.87
1966 161,840 1,165 163,005 8.42 0.72
1967 173,884 1,241 175,125 8.95 0.71
1968 164,592 1,001 165,593 8.39 0.60
1969 154,054 946 155,000 7.77 0.61
1970 161,366 1,085 162,451 8.07 0.67
1971 167,149 1,215 168,364 8.26 0.72
1972 152,840 1,094 153,934 7.33 0.71
1973 144,929 985 145,914 6.89 0.68
1974 156,958 1,009 157,967 7.39 0.64
1975 208,064 1,266 209,330 9.69 0.60
1976 207,926 1,141 209,067 9.59 0.55
1977 180,062 1,132 181,194 8.23 0.62
1978 167,776 995 168,771 7.58 0.59
1979 182,344 915 183,259 8.14 0.50
1980 359,768 1,184 360,952 15.85 0.33
1981 358,997 1,332 360,329 15.67 0.37
1982 366,331 1,535 367,866 15.84 0.42
1983 373,064 1,670 374,734 15.99 0.45
1984 342,848 1,447 344,295 14.57 0.42
1985 362,939 1,597 364,536 15.29 0.44
1986 476,214 1,642 477,856 19.86 0.34
1987 559,658 1,620 561,278 23.12 0.29
1988 593,158 1,409 594,567 24.27 0.24
1989 641,528 1,465 642,993 25.71 0.23
1990 723,886 1,598 725,484 29.03 0.22
1991 878,626 1,773 880,399 34.85 0.20
1992 971,047 1,443 972,490 38.08 0.15
1993 917,350 1,384 918,734 35.60 0.15
1994 844,087 1,170 845,257 32.43 0.14
1995 856,991 1,113 858,104 32.62 0.13
1996 1,040,915 1,195 1,042,110 39.26 0.11
1997 1,315,782 1,217 1,316,999 49.16 0.09

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

Table 5. Wage Earner Bankruptcy and No Asset Cases, 1899-1933

Percentage of Cases
Year Wage Earners With No Assets
1899 5,288 51.12
1900 7,516 40.52
1901 7,068 48.99
1902 6,859 47.25
1903 4,852 41.36
1904 5,291 40.55
1905 5,426 40.75
1906 2,748 42.29
1907 3,257 42.11
1908 3,492 40.29
1909 3,528 38.46
1910 4,366 36.49
1911 4,139 48.14
1912 4,161 50.70
1913 4,863 49.63
1914 5,773 49.96
1915 6,632 49.88
1916 6,418 53.29
1917 7,787 57.12
1918 8,230 57.05
1919 6,743 64.53
1920 5,601 67.41
1921 5,897 65.66
1922 7,550 52.70
1923 10,173 61.10
1924 13,126 62.17
1925 14,444 61.23
1926 16,770 64.02
1927 18,494 64.86
1928 21,510 63.19
1929 25,478 67.34
1930 28,979 68.44
1931 29,698 69.15
1932 29,742 66.25
1933 27,385 62.76

Sources: 1899-1938 Annual Report of the Attorney General of the United States; 1939-1997; and Statistical Abstract of the United States. Various years. The Report of the Attorney General did not provide the numbers voluntary and involuntary from 1934-36.

In 1933, Congress enacted amendments that allowed farmers and wage earners to seek arrangements. Arrangements offered more flexibility than compositions. Debtors could offer to pay all or part of their debts over a longer period of time. Congress also added section 77, which provided for railroad reorganization. Section 77 solved two of the problems that had plagued corporate reorganization. Bankruptcy courts had jurisdiction of the assets throughout the country so that ancillary receiverships were not needed. The amendment also alleviated the holdout problem by making 2/3 votes of a class of creditors binding on all the members of the class. In 1934, Congress extended reorganization to non-railroad corporations as well. The Thacher Report’s recommendations for a bankruptcy administrator were not enacted, largely because of opposition from bankruptcy lawyers. The 1898 Bankruptcy Act had created a well-organized group with a vested interest in the evolution of the law–bankruptcy lawyers.

Although the 1933-34 reforms were ones that bankruptcy lawyers and judges had wanted, many of them believed that the law could be further improved. In 1932, The Commercial Law League, the American Bar Association, the National Association of Credit Management and the National Association of Referees in Bankruptcy joined together to form the National Bankruptcy Conference. The culmination of their efforts was the Chandler Act of 1938. The Chandler Act created a menu of options for both individual and corporate debtors. Debtors could choose traditional liquidation. They could seek an arrangement with their creditors through Chapter 10 of the Act. They could attempt to obtain an extension through Chapter 12. A corporation could seek an arrangement through Chapter 11 or reorganization through Chapter 10. Chapter 11 only allowed corporations to alter their unsecured debt, whereas Chapter 10 allowed reorganization of both secured and unsecured debt. However, corporations tended to prefer Chapter 11 because Chapter 10 required Securities and Exchange Commission review for all publicly traded firms with more than $250,000 in liabilities.

By 1938 modern American bankruptcy law had obtained its central features. The law dealt with all types of individuals and businesses. It allowed both voluntary and involuntary petitions. It enabled debtors to choose liquidation and a discharge, or to choose some type of readjustment of their debts. By 1939, the vast majority of bankruptcy cases were, as they are now, voluntary consumer bankruptcy cases. After 1939 involuntary bankruptcy cases never again rose above 2,000. (See Table 4). The decline of involuntary bankruptcy cases appears to have been associated with the decline in business failures. According to Dun and Bradstreet, the number of failures per 10,000 listed concerns averaged 100 per year from 1870 to 1933. From 1934-1988 the failure rate averaged 50 per 10,000 concerns. The failure rate did not rise above 70 per 10,000 listed concerns again until the 1980s. Also, the number of failures, which had averaged over 20,000 a year in the 1920s did not reach 20,000 a year again until the 1980s. The mercantile failures which had so troubled late nineteenth century merchants and manufacturers were much less of a problem after the Great Depression.

Table 6. Business Failures, 1870-1997

Failures per
Year Failures 10,000 Firms
1870 3,546 83
1871 2,915 64
1872 4,069 81
1873 5,183 105
1874 5,830 104
1875 7,740 128
1876 9,092 142
1877 8,872 139
1878 10,478 158
1879 6,658 95
1880 4,735 63
1881 5,582 71
1882 6,738 82
1883 9,184 106
1884 10,968 121
1885 10,637 116
1886 9,834 101
1887 9,634 97
1888 10,679 103
1889 10,882 103
1890 10,907 99
1891 12,273 107
1892 10,344 89
1893 15,242 130
1894 13,885 123
1895 13,197 112
1896 15,088 133
1897 13,351 125
1898 12,186 111
1899 9,337 82
1900 10,774 92
1901 11,002 90
1902 11,615 93
1903 12,069 94
1904 12,199 92
1905 11,520 85
1906 10,682 77
1907 11,725 83
1908 15,690 108
1909 12,924 87
1910 12,652 84
1911 13,441 88
1912 15,452 100
1913 16,037 98
1914 18,280 118
1915 22,156 133
1916 16,993 100
1917 13,855 80
1918 9,982 59
1919 6,451 37
1920 8,881 48
1921 19,652 102
1922 23,676 120
1923 18,718 93
1924 20,615 100
1925 21,214 100
1926 21,773 101
1927 23,146 106
1928 23,842 109
1929 22,909 104
1930 26,355 122
1931 28,285 133
1932 31,822 154
1933 19,859 100
1934 12,091 61
1935 12,244 62
1936 9,607 48
1937 9,490 46
1938 12,836 61
1939 14,768 70
1940 13,619 63
1941 11,848 55
1942 9,405 45
1943 3,221 16
1944 1,222 7
1945 809 4
1946 1,129 5
1947 3,474 14
1948 5,250 20
1949 9,246 34
1950 9,162 34
1951 8,058 31
1952 7,611 29
1953 8,862 33
1954 11,086 42
1955 10,969 42
1956 12,686 48
1957 13,739 52
1958 14,964 56
1959 14,053 52
1960 15,445 57
1961 17,075 64
1962 15,782 61
1963 14,374 56
1964 13,501 53
1965 13,514 53
1966 13,061 52
1967 12,364 49
1968 9,636 39
1969 9,154 37
1970 10,748 44
1971 10,326 42
1972 9,566 38
1973 9,345 36
1974 9,915 38
1975 11,432 43
1976 9,628 35
1977 7,919 28
1978 6,619 24
1979 7,564 28
1980 11,742 42
1981 16,794 61
1982 24,908 88
1983 31,334 110
1984 52,078 107
1985 57,078 115
1986 61,616 120
1987 61,111 102
1988 57,098 98
1989 50,631 65
1990 60,747 74
1991 88,140 107
1992 97,069 110
1993 86,133 96
1994 71,558 86
1995 71,128 82
1996 71,931 86
1997 84,342 89

Source: United States. Historical Statistics of the United States: Bicentennial Edition. 1975; and United States. Statistical Abstract of the United States. Washington D.C.: GPO. Various years.

The Bankruptcy Reform Act of 1978

In contrast to the decline in business failures, personal bankruptcy climbed steadily. Prompted by a rise in personal bankruptcy in the 1960s, Congress initiated an investigation of bankruptcy law that culminated in the Bankruptcy Reform Act of 1978, which replaced the much amended 1898 Bankruptcy Act. The Bankruptcy Reform Act, also known as the Bankruptcy Code or just “the Code”, maintains the menu of options for debtors embodied in the Chandler Act. It provides Chapter 7 liquidation for businesses and individuals, Chapter 11 reorganization, Chapter 13 adjustment of debts for individuals with regular income, and Chapter 12 readjustment for farmers. In 1991, seventy-one percent of all cases were Chapter 7 and twenty-seven percent were Chapter 13. Many of the changes introduced by the Code made bankruptcy, especially Chapter 13, more attractive to debtors. The number of bankruptcy petitions did climb rapidly after the law was enacted. Lobbying by creditor groups and a Supreme Court decision that ruled certain administrative parts of the Act unconstitutional led to the Bankruptcy Amendments and Federal Judgeship Act of 1984. The 1984 amendments attempted to roll back some of the pro-debtor provisions of the Code. Because bankruptcy filings continued their rapid ascent after the 1984, recent studies have tended to look toward changes in other factors, such as consumer finance, to explain the explosion in bankruptcy cases.

Bankruptcy law continues to evolve. To understand the evolution of bankruptcy law is to understand why groups of people came to believe that existing debt collection law was inadequate and to see how those people were able to use courts and legislatures to change the law. In the early nineteenth century demands were largely driven by victims of financial crises. In the late nineteenth century, merchants and manufacturers demanded a law that would facilitate interstate commerce. Unlike its predecessors, the 1898 Bankruptcy Act was not repealed after a few years and over time it gave rise to a group with a vested interest in bankruptcy law, bankruptcy lawyers. Bankruptcy lawyers have played a prominent role in drafting and lobbying for bankruptcy reform since the 1930s. Credit card companies and customers may be expected to play a significant role in changing bankruptcy law in the future.

References

Balleisen, Edward. Navigating Failure: Bankruptcy and Commercial Society in Antebellum America. Chapel Hill: University of North Carolina Press. 2001.

Balleisen, Edward. “Vulture Capitalism in Antebellum America: The 1841 Federal Bankruptcy Act and the Exploitation of Financial Distress.” Business History Review 70, Spring (1996): 473-516

Berglof, Erik and Howard Rosenthal (1999) “The Political Economy of American Bankruptcy: The Evidence from Roll Call Voting, 1800-1978.” working paper, Princeton University.

Coleman, Peter J. Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607-1900. Madison: The State Historical Society of Wisconsin. 1974.

Hansen, Bradley. “The Political Economy of Bankruptcy: The 1898 Act to Establish A Uniform System of Bankruptcy.” Essays in Economic and Business History 15, (1997):155-71.

Hansen, Bradley. “Commercial Associations and the Creation of a National Economy: The Demand for Federal Bankruptcy Law.” Business History Review 72, Spring (1998): 86-113.

Hansen, Bradley. “The People’s Welfare and the Origins of Corporate Reorganization: The Wabash Receivership Reconsidered.” Business History Review 74, Autumn (2000): 377-405.

Martin, Albro. “Railroads and the Equity Receivership: An Essay on Institutional Change.” Journal of Economic History 34, (1974): 685-709.

Matthews, Barbara. Forgive Us Our Debts: Bankruptcy And Insolvency in America, 1763-1841. Ph. D. diss. Brown University. 1994.

Moss, David and Gibbs A. Johnson. “The Rise of Consumer Bankruptcy: Evolution, Revolution or Both?” American Bankruptcy Law Journal 73, Spring (1999): 311-51.

Sandage, Scott. Deadbeats, Drunkards and Dreamers: A Cultural History of Failure in America, 1819-1893. Ph. D. diss. Rutgers University. 1995.

Skeel, David A. “An Evolutionary Theory of Corporate Law and Corporate Bankruptcy.” Vanderbilt Law Review, 51 (1998):1325-1398.

Skeel, David A. “The Genius of the 1898 Bankruptcy Act.” Bankruptcy Developments Journal 15, (1999): 321-341.

Skeel, David A. Debt’s Dominion: A History of Bankruptcy Law in America. Princeton: Princeton University Press. 2001.

Sullivan, Theresa, Elizabeth Warren and Jay Westbrook. As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America. Oxford: Oxford University Press. 1989.

Swain, H.H. “Economic Aspects of Railroad Receivership.” Economic Studies 3, (1898): 53-161.

Tufano, Peter. “Business Failure, Judicial Intervention, and Financial Innovation: Restructuring U. S. Railroads in the Nineteenth Century.” Business History Review 71, Spring (1997):1-40.

United States. Report of the Attorney-General. Washington D.C.: GPO. Various years.

United States. Statistical Abstract of the United States. Washington D.C.: GPO. Various years.

United States. Historical Statistics of the United States: Bicentennial Edition. 1975.

Warren, Charles. Bankruptcy In United States History. Cambridge: Harvard University Press. 1935.

Citation: Hansen, Bradley. “Bankruptcy Law in the United States”. EH.Net Encyclopedia, edited by Robert Whaples. August 14, 2001. URL https://eh.net/encyclopedia/bankruptcy-law-in-the-united-states/