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Bankruptcy in history: What is the origin of bankruptcy?

The ability to file for Chapter 7 bankruptcy and have one's financial slate -- for all intents and purposes -- wiped clean could feel like a miracle to those who benefit from the process. This certainly begs the question: What is the origin of bankruptcy and how did this legal option come to exist in our current system of laws?

The first bankruptcy law in the United States was passed by Congress in the year 1800. This law came about following 10 years of off-and-on financial crises and other commercial failures throughout the United States. The Bankruptcy Act was a workable solution offered by Congress to help those who had suffered the worst from the ailing economy.

Congress modeled the Bankruptcy Act on English law that was already in place. Back then, bankruptcy was only available to bankers, merchants and brokers. Furthermore, it was only offered on the petition of creditors. Court appointed commissioners were tasked with administering every bankruptcy case, and creditors were permitted to select the assignee who would control the bankruptcy estate. The first bankruptcy law, however, was not very popular and Congress repealed it three years later even though it was supposed to be in place until 1805.

It took some years before another bankruptcy option emerged through the Bankruptcy Act of 1841, which provided district courts with jurisdiction over matters of disagreement between those who were "bankrupt" and their creditors. The Bankruptcy Act of 1841 was only in place for a short time and it resulted in 33,000 filings, which overburdened the dockets of district courts throughout the country. Unfortunately, the law became unpopular due to opponents, who claimed it was too sympathetic to debtors and allowed them to discharge their debts too easily.

Bankruptcy laws are always changing and adjusting to reflect current financial trends and needs of business, the government and individuals. King County residents who are considering filing for Chapter 7 bankruptcy, or pursuing another kind of debt resolution strategy, may want to discuss their options with an experienced bankruptcy lawyer.

Source: Federal Judicial Center, "Bankruptcy Jurisdiction in the Federal Courts," accessed Jan. 10, 2017

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