During the 1980s and 1990s, bankruptcy became a relatively common practice among individuals and businesses. Courts were flooded with bankruptcy cases and it became apparent that the bankruptcy was all too often being used as an easy way out. Many very large companies declared bankruptcy including Greyhound, Continental Airlines, and Pan Am. For the most part these were Chapter 11 reorganizations.

Because of the excessive number of cases however, pre-packaged bankruptcies became the practice, in which companies came to bankruptcy court having already agreed on certain terms with all its creditors. This saved time and helped bankruptcy courts keep up with the cases.

Still, President Clinton signed the Bankruptcy Reform Act of 1994 into law, to further expedite bankruptcy proceedings and to encourage the use of Chapter 13 bankruptcies for individuals, rather than the “all debts forgiven” practice of Chapter 7. This act also established the National Bankruptcy Review Commission.

After extensive study, in 1997, this commission published a detailed report on the uses and misuses of bankruptcy in the United States. This helped lead to the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), signed by President George W. Bush.

This act helped curb the bankruptcy mills that taught individuals how to finagle the system to get a bankruptcy they didn’t really qualify for. It insisted that Americans who have something to pay will pay something to their debtors. But it also provided for those under median income who are not required to pay back their debts. Finally, bankruptcy use would be limited to every 8 years for Chapter 7, so people cannot keep racking up debt and filing bankruptcy.

The U.S. has a bankruptcy history going back to 1800, but it has taken until the most recent years for individuals and companies that are genuinely struggling to be able to apply for protection from creditors and be relieved of their burdensome debts.

In 1938, the Chandler Act added significant applications for businesses facing financial ruin. In the same year, Congress enacted Section 60e of the Bankruptcy Act, to give customers of businesses, rather than creditors, the first priority in claims over the insolvent business.

When in 1969 through 1970, brokerage houses began abusing the bankruptcy laws and shattering investor confidence, Congress had to act again. They put into law the Securities Investor Protection Act of 1970 to increase the accountability of brokers and dealers in the security trade and restore investor confidence.

At last, in 1978, the Bankruptcy Reform Act was passed, going into effect October 1st of 1979. This is the act that still stands today, governing current bankruptcy cases. And while it was not yet complete in its first year, the Bankruptcy Reform Act made bankruptcies and reorganization of financial affairs simpler for individuals and businesses alike.

When the Bankruptcy Reform Act of 1978 was passed, it replaced the 1898 Act and the Chapters of that act and the Chandler Act amendment. Because this reform act was a significant change, it is understandable that controversy and conflict quickly arose.

As a result, the 1980s was a time of many new bankruptcy laws created as clarifications and amendments to the 1978 Act. For example, in 1980, the Bankruptcy Tax Act was passed, describing previously neglected issues of taxes in bankruptcy cases. Tax loss carry-forwards and rules for taxes on remaining assets were explained.

In 1982, the Supreme Court ruled that bankruptcy judges had been given power beyond that supported by the constitution. And in 1983, the Supreme Court ruled that companies should not be able to so easily terminate labor contract. Therefore, the Bankruptcy Amendment Act of 1984 narrowed and specified the powers of the bankruptcy judicial system.  It also reduced companies’ rights to end labor contracts.

Still, there were those who were not entitled to protection under bankruptcy. In 1986, family farmers and family fishermen were directly included in this protection with the advent of Chapter 12. This bankruptcy option allowed those that ran family crop, animal, or fish farms to keep their farm in spite of bankruptcy.

In the United States bankruptcies have only been available off and on and under specific conditions since 1800. Before that there were no options for a debtor who could not pay but prison and other punishments. While the first bankruptcy law was put into place in 1800, it was only in response to land speculation and was repealed just 3 years later.

Due to the financial panic in 1837, a second law for bankruptcies was put into place in 1841. But again, it was repealed just 2 years later. Concerns about the implications of bankruptcy as an option continued to prevent bankruptcy laws from being maintained.

Then, the Civil War caused significant economic distress. In response to this situation, Congress passed yet another bankruptcy law, in 1867. 2 years later, as with the first 2 laws, it was repealed. This law had been the first to include corporations, rather than just individual debtors.

Throughout the 1800s, laws enacted for bankruptcies were meant to serve the creditor and to find a way to get the owed money from the debtor. These were involuntary bankruptcies, meaning that they were imposed upon the debtor in arrears, rather than initiated by the debtor. These were punishing laws.

However, during the last 2 years of the century, the Bankruptcy Act of 1898 was put into law, an act which did not focus on punishing the company in debt. Instead, the law was meant to help rehabilitate and reorganize companies in financial distress. The company could be put into “equity receivership” as a protection from creditors.

With the experience of the Great Depression and the universal suffering and financial ruin it caused, lawmakers increased their compassion towards the financially insolvent. Laws were enacted in both 1933 and 1934 with an emphasis on helping the unfortunate but honest debtor obtain a fresh start.

Bankruptcy, like many words, stems from the ancient Latin vocabulary. The word “bancus” meant bench and “ruptus” meant broken. In old Italy, bankers operated in public markets or fairs, on a bench. This is where they exchanged monies and had dealings with the public.

If one of these bankers became insolvent and was no longer able to operate his business, he would break his bench to let the public know. This would alert his customers and public that he could no longer do business with them.

In Ancient Greece, there was no such thing as bankruptcy. Quite the contrary, if a man could not pay his debts, he, his wife, his children, and all of his servants would be turned over as debt slaves to the creditor. Once the creditor recouped his losses, through their labor, the debtor and his family could go free, but the debtor’s servants were usually kept by the creditor. Some city-states had laws protecting the life and limb of debt slaves and limiting the debt slavery to 5 years or less.

The Qur’an, of the Islamic people, is an ancient religious document. It teaches that men who are unable to pay their debts on time should be allowed time to pay these debts. The Qur’an states, “And if someone is in hardship, then let there be postponement until a time of ease. But if you give from your right as charity, then it is better for you, if you only knew.”

The Old Testament, or Torah, indicates that by Mosaic Law, every seventh year members of the community are released of their debts. Foreigners are not included in this law. But every 49th year (7 times 7), foreigners are also included in this “Year of Jubilee” when all debts are released. The Year of Jubilee is celebrated with the blowing of trumpets in Israel.

The first law to be enacted in England regarding bankruptcy, was put into effect in 1542. The Statute of Bankrupts, as it was called, dealt with insolvency in a harsh way, forcibly removing all of an individual’s belongings for creditors. A much harsher law, enacted in East Asia by Genghis Khan, called for the death of anyone who was bankrupt three times.

Thankfully, modern bankruptcy laws are significantly more lenient than this. And, instead of strictly punishing the debtor, many of these laws look to the possibilities of reorganization and resolution of an individual’s or company’s financial insolvency.