Why The History of Personal Bankruptcy Laws Still Matters Today

We're Still Shunning, Shaming, and Yes, Punishing those Who Have Declared Bankruptcy

“For the times they are a-changin’

Bob Dylan

The full lyrics for Dylan’s prophetic song are well worth reading and listening to right now.

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Punishment for debtors, perhaps?

The times certainly have changed, but it is embarrassingly clear that many of our laws have not kept up with the times. I bet you’re thinking… “But bankruptcy laws? Why did she have to single out the most boring laws of all? What could bankruptcy have to do with my life?” And I would have agreed with you… until I was forced to declare Chapter 7 Bankruptcy several years ago in a last-ditch effort to stop the foreclosure sale of my home. Fortunately, I was able to delay the sale, courtesy of the glacial pace of the court system, long enough to sell my home a couple of years later. I can assure you I am still paying the price of bankruptcy today, and so are millions of others. But should we be?

It’s amazing the wide-ranging and positive impact direct payment to individuals and the implementation of laws designed to help people had, isn’t it?

These are the latest statistics and analysis on business and non-business bankruptcy filings in the U.S. as of March 31, 2021. The good news is that all bankruptcies dropped sharply from March 2020 through March 2021; in fact, business bankruptcies dropped by 13.9% and non-business bankruptcies plummeted by 38.8% by comparison with the previous year ending March 2020. The federal court website attributes this drop to a number of factors, and all appear to be related to the Covid- pandemic:

— many federal courts closed for in-person business;

— state lock-down orders may have depressed personal spending;

— increased government benefits (non-taxable stimulus payments and enhanced unemployment), along with eviction moratoriums and and a ban on foreclosures of federally backed mortgages.

The federal court synopsis concludes by saying that these government measures

“…also may have eased financial pressures in many households.”

It’s amazing the wide-ranging and positive impact direct payment to individuals and the passage of laws designed to help people had on our society, isn’t it? It addition to a large drop in bankruptcies, it also decreased poverty, and allowed workers some leverage in their job choices, to choose a place of employment, not out of desperation, but what works best for their families. Why does it take a deadly pandemic for our government to help its own population?

But I digress…

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First, the timeline of U.S. bankruptcy law is helpful to understand its impact. I knew that Article 1, Section 8 of the Constitution “…empowers Congress to enact uniform laws on the subject of bankruptcy”, but didn’t realize that a permanent Federal Bankruptcy Act was not passed by Congress until 1898. There had been three previous federal bankruptcy laws passed in 1800, 1841 and 1867, each in response to financial crises, and each was later repealed. Despite a reportedly intense campaign by merchants and manufacturers in favor of a a national and permanent bankruptcy law, Congress could not agree on the specifics of the law, with Democrats and Republicans battling for nearly 20 years before its passage. (Some things never change, right?)

I think the historical context behind our country’s bankruptcy laws are even more instructive because even from a cursory review, it appears that our attitudes about personal bankruptcy and those who file for personal bankruptcy relief haven’t changed much in over 100 years. And I believe it’s at least partly these ancient attitudes that have kept our laws from keeping pace with the times.

And I do mean ancient attitudes. In “primitive societies”, long before bankruptcy laws, there were debtors and creditors, and debtors, whether for honest or unscrupulous reasons, sometimes defaulted on their obligations.

Let’s just say the punishment for someone in default of his debts was a tad unreasonable — it was based on retribution, rather compensation to the creditor, and the debtor was routinely excommunicated from his house of worship and shamed in front of his family… and often, I’m embarrassed for the human race to say, executed. Even if the debtor was not killed for his crime of insolvency, ancient religious law¹ recommended that “No one should have any dealings with a bankrupt after his bankruptcy; he who does deal with the bankrupt can have no legal redress as to such transactions." And so the debtor was shunned and often excluded from business transactions, probably for the rest of his life.

And historically, debtor-creditor settlements, and later bankruptcy laws, put the protection of the honest debtor from the unscrupulous creditor dead last, if at all:

…bankruptcy law seeks to protect the creditors, first, from one another and, secondly, from their debtor. *A third object, the protection of the honest debtor from his creditors, by means of the discharge, is sought to be attained in some of the systems of bankruptcy, but this is by no means a fundamental feature of the law.

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Remember Wimpy?

Thankfully our societies have progressed a bit in the treatment of the bankrupt, but the underlying attitudes seem to have remained the same, and the specific attitudes about bankruptcy itself help us learn about the attitudes about poverty in general. After all, you must be short of money if you can’t pay your debts and are forced to avail yourself of bankruptcy protection. And the long held stereotypes of the poor and those who declare bankruptcy have long overlapped: they are bad people worthy of being separated from the rest of the respectable folk, are required to pay for money management and credit counseling classes before their debt is discharged (even though what they really need is more income), and punished for up to 10 years with obscenely high interest credit card offers and negative credit reporting hits. It’s the modern day equivalent to the “Scarlet A”, only for bankruptcy, and it hasn’tchanged much in a century.

In my next post, I’ll cover how and why bankruptcy laws have been revised in the last few decades and how these revisions impact you or someone you know.

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1. University of Pennsylvania law review article, titled “The Early History of Bankruptcy Law”, written in 1918 by L.E. Levinthal