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A Brief History of Bankruptcy

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Everything is so political today. From health care reform and recession bailouts to the multitude of Web sites, cable news stations and talking heads that cover the debates, there seems to be no escape from the issues that are shaping our country. However, in the thick morass of over-done analysis and futile attempts to put every issue, no matter how minute, into historical context, we have like no other time in history, lost sight of how we ended up where we are today. Not just financially, but socially, mentally and as a country.

Those thoughts made us realize that maybe it's healthy for us to look back on things from time to time to get a better understanding of why someone may think the way they do or why an organization reacted the way it did to an important social issue. So, why not look back at bankruptcy? What are its roots? How did it come into being?

Read on ...

Prior to America's independence and the formal creation of the United States, colonies handled personal debt differently. There was very little consistency on day-to-day measures but when caught, most colonies would rely on the traditional British rule relative to handling debtors: prison. Yes, debtors prison was a very real thing.

Our country's founders envisioned new ways of handling those in severe debt. Basically, changing bankruptcy laws was another method of departure from British rule. Understanding that personal debt was a real threat to the American way of life but still under pressure to address its punishment, a bankruptcy clause was added to the Constitution after the Constitutional Convention in 1787. This action prevented some states from creating "debtors' havens" that would offer widespread protection for those who owed. The importance of this action was that it established bankruptcy into the constitutional vernacular. It made those in power understand the impact debt can have on a country trying to grow.

Eleven years after the ratification of the Constitution in 1800, Congress passed the first national bankruptcy law, the first iteration of what we have today. Still, creditors remained powerful and the law was repealed. States tried creating their own laws to deal with bankruptcy but Supreme Court rulings continued to deny their enactment. On a good note, 1833 saw the official end to debtors' prisons but honest debtors still faced tough consequences as creditors remained the beneficiaries of bankruptcy laws.

Less than a decade after the first bankruptcy law was passed, Daniel Webster campaigned diligently on behalf of debtors and won over Congress in the passing of the Bankruptcy Act of 1841, which finally enabled debtors to benefit from bankruptcy. Almost, anyway.

Webster's efforts were shot down three years later under intense political pressure applied by creditors and those in Congress they could influence. (Not a real departure from what happens today, right?) The law in favor of creditors came and went again before and after the Civil War. Finally, as the country was inching toward the turn of the Century, the Bankruptcy Law of 1898 was passed and in it lied the concept of unconditional discharge, which illustrated the collective notion that honest debtors needed a method of relief out from under the approval of others. Thus, modern bankruptcy code was born.

Granted, the law has fluctuated several times through the decades and in 2005, creditors won a seeming victory in the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA). The Act made drastic changes to the existing bankruptcy code, with the hope that the new bureaucratic red-tape would decrease bankruptcy filings. However, as bankruptcy courts have sorted through the poorly drafted BAPCPA, they have generally construed the provisions in favor of debtors. For instance, pre-BAPCPA, it was more likely that unsecured creditors would receive a payout in a Chapter 13 bankruptcy. Post-BAPCPA, the majority of Chapter 13 cases pay nothing to unsecured creditors. The new Means Test, a gate-keeping provision to restrict high income earners from filing for Chapter 7, has no effect on the majority of filers. According to numerous studies, only about 20% of bankruptcy filers earn enough income to be subject to the Means Test. Less than 10% "fail" the means test, but these filers are usually still eligible for full discharge in a Chapter 13 bankruptcy.

It's important to talk with an experienced bankruptcy attorney who thoroughly understands the new law and how to properly apply it to your case. In North Carolina, the attorneys at the Law Offices of John T. Orcutt are BAPCPA experts. Call today to set up a free initial consultation and find out how bankruptcy can work for you. 1-888-234-4181.

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