Bankruptcy law

Bankruptcy law: Bankruptcy in the New Nation

Bankruptcy law: Corporate Bankruptcy After 1978

Bankruptcy law: The 2005 Bankruptcy Act

Bankruptcy law: Real Estate in Bankruptcy

Business and Consumer Bankruptcy Filings, 1980-2007

Definition: Statutes and common law providing a legal framework within which courts examine debtors’ assets and creditors’ claims, oversee distribution of those assets among creditors, and cancel remaining debts
Significance: Uniform bankruptcy laws are pivotal in a rapidly growing, credit-based economy. Their purpose is to grant equitable treatment to creditors and give debtors fresh starts. Without them, lenders have no assurance that their claims will receive just treatment in the event of borrower default. Borrowers, conversely, are reluctant to commit to a risky enterprise if the consequences of failure are too dire.

Historically, American legislators have upheld national goals of economic growth and social mobility by passing bankruptcy laws more generous to debtors than those in most European countries. America has been a nation of debtors from the outset, as its settlers borrowed to pay for their passage from Europe, to buy and clear land, to build and operate mills, to purchase slaves, and to gamble and drink. Inevitably, some investments went sour, and some individuals failed to prosper, leaving them to face the eighteenth century English legal system, which valued commerce and capital over human life.

Legal bankruptcy was possible in colonial America, but it was not an attractive option. The law allowed seizure and sale of all a debtor’s assets, including furniture, his wife’s clothes, and the tools of his trade. In theory, debtors could be executed if they concealed anything of value from bankruptcy adjudicators. In practice, however, the handful of executions for debt in eighteenth century England involved massive corporate fraud. Although the total liquidation of debtors’ assets bought release from debtor’s prison, it did not result in cancellation of their debts. Creditors could renew collection efforts if a debtor’s circumstances improved.

Further Reading

• Coleman, Peter J. Debtors and Creditors in America: Insolvency, Imprisonment for Debt, and Bankruptcy, 1607-1900. Frederick, Md.: Beard Books, 1999. Contains a wealth of information on sociological factors behind bankruptcy legislation. 
• Delaney, Kevin J. Strategic Bankruptcy: How Corporations and Creditors Use Chapter 11 to Their Advantage. Berkeley: University of California Press, 1992. Case studies of large corporations that use bankruptcy as part of a business plan. 
• Skeel, David A. Debt’s Dominion: A History of Bankruptcy Law in America. Princeton, N.J.: Princeton University Press, 2001. Thorough and scholarly, with coverage from the colonial period through the end of the twentieth century. 
• Sommer, Henry J. Consumer Bankruptcy Law and Practice. Boston: National Consumer Law Center, 2004. Aimed at attorneys, with a focus on individual bankruptcies under the 1978 bankruptcy reform legislation and its revisions. 
• Sullivan, Theresa, Elizabeth Warren, and Jay Westbrook. As We Forgive Our Debtors: Bankruptcy and Consumer Credit in America. Oxford, England: Oxford University Press, 1989. Based on a large study of consumer bankruptcies; focuses on economic trends and provides good treatment of women’s issues.

See also: Chrysler bailout of 1979; Credit card buying; Enron bankruptcy; Incorporation laws; Supreme Court and contract law; WorldCom bankruptcy.