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History of Bankruptcy

Bankruptcy has existed in the United States ever since the first U.S constitution was framed in late 18th century. What is bankruptcy? In simple terms, bankruptcy is a declaration by the judiciary that an individual or entity does not have the ability to pay off its debt. Providing and governing a well-organized and just liquidation of insolvent debtors estates was the purpose bankruptcy laws were passed. Ever since the Middle Ages, this purpose has been an important bankruptcy legislation aim.

The first official laws related to bankruptcy were passed in England in 1542. At that time, bankruptcy was considered a crime and bankrupt individuals were subjected to criminal punishment. The punishment ranged from imprisonment to death penalty. After England passed the law, Spain followed suit and declared bankruptcy a crime in late 16th century. As far as the United States is concerned, the first ever bankruptcy law was passed in 1800. The law was passed as a response to a land conjecture.

Throughout the 19th century, various bankruptcy laws were passed in the United States. All of the laws that were passed include some allowance for discharge of outstanding debts. Prior to the 20th century, bankruptcy laws were mainly passed to favor the creditor and showed little mercy to the bankrupt individual or entity. However, bankruptcy laws passed during the 20th century changed all that. Rather than punishing the debtor, the bankruptcy passed during the 20th century looked to rehabilitate or reorganize them.

Providing a ‘fresh start’ to debtors was the main reason the Bankruptcy Act of 1933 and 1934 were passed in the United States. In 1938, the Chandler Act of 1938 was passed in the U.S. The act or law provided bankrupt businesses considerable provisions for reorganization. Since then, the bankruptcy law was reformed twice in the United States: once in 1978 and a second time in 2005. Ever since the turn of the 20th Century, the Bankruptcy laws have looked to protect and reorganize bankrupt individuals and entities in the United States and this is how things are likely to be in the future as well.

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