Bankruptcy Act of 1800

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The Bankruptcy Act of 1800 was the first piece of federal legislation in the United States surrounding bankruptcy. The act was passed in response to a decade of periodic financial crises and commercial failures. It was modeled after English practice. The act placed the bankrupt estate under the control of a commissioner chosen by the district judge. The debt would be forgiven if two-thirds of creditors (by both number and dollar amount) agreed to forgive the remaining debt. Only merchants could petition a creditor to file a case under the provisions of the act.^[1]

The Bankruptcy Act of 1800, also known as the "Composition Act," was the first significant piece of legislation passed by the United States Congress during the early years of the young nation. This act provided a legal framework for individuals and businesses facing financial burden. Under the Bankruptcy Act of 1800, debtors had the option to seek relief from their creditors by voluntarily surrendering their assets, which would then be distributed among their creditors in a fair and organized manner. This act's main purpose was to balance creditors' rights to recoup their losses and the need to give debtors a chance for a fresh financial start. However, the Bankruptcy Act of 1800 faced challenges and criticism, leading to its repeal in 1803, as it was considered by some to be overly favorable to debtors and was seen as a threat to the economic stability of the time. Despite its relatively short existence, this act marked an essential step in developing bankruptcy law in the United States, setting the stage for future legislative efforts to address issues of financial distress and insolvency.^[2]

Before independence, bankruptcy law in the Thirteen Colonies followed English common law. After multiple wars, including the Seven Years' War and the American Revolutionary War, debt became more common not only at a national level but also in personal affairs. With this change came a shift in perspective surrounding debt. Instead of viewing it as a moral flaw, as English policy did, it became known as bad luck or a result of unfortunate events. By setting up a separate system for debtors and creditors, the United States attempted to curb the number of bankrupt citizens being put in jail. The act was meant as a temporary measure with a five-year sunset clause. Congress repealed the act in 1803.^[3]

Prior to independence, policies concerning bankruptcy in the Thirteen Colonies followed English common law. In the late eighteenth century, bankruptcy was seen as a moral failure in England. People were expected to keep their affairs in order and any deviance from upright economic standing was considered a personal fault. Individuals who were unable to pay back their debts had their property confiscated and assigned to the creditor, or were imprisoned.^[4] The English ideology during the Victorian Era, bankruptcy was considered a criminal act, and those who faced financial insolvency were often stigmatized as wrongdoers deserving of punishment. This not only inflicted shame and embarrassment upon the individuals involved but also cast a shadow of disgrace over their families and social circles. The prospect of facing bankruptcy struck fear into the hearts of middle-class individuals who had diligently strived to improve their lives. It was not just the risk of losing all their possessions but the potential ruin of their social standing that loomed large. Fortunately, the chances of being declared bankrupt were relatively low unless they made a significant financial blunder or encountered a particularly adverse period during an economic downturn.^[5]

Since the sixteenth century, those in debt have faced incarceration. This practice persisted into the nineteenth century, with debtor's prisons commonplace. Debtors were imprisoned at the discretion of their creditors, and their release was contingent on either working off their debts or making total payments. Even after settling their debts, they still required the consent of their creditors to secure their freedom

In the years following American independence, the nation accrued significant debt as a result of the Seven Years' War and the American Revolutionary War. The national debt destabilized the economy and resulted in higher debts for private citizens. As debt became more common, the nation did not abandon English practice, though it was often modified in the arrangements between debtors and creditors.^[6]

After gaining independence from Britain, the United States faced a substantial increase in debt due to the financial strains caused by both the Seven Years' War and the American Revolutionary War. This mounting national debt had destabilizing effects on the economy, leading to increased indebtedness among private citizens. Despite the prevalence of debt, the nation did not entirely discard English financial practices; however, there were often modifications in the agreements between debtors and creditors.^[7]

The legislation allowed creditors to initiate bankruptcy proceedings against individuals unable to settle their debts. Once initiated, these bankruptcy cases were referred to district judges, who appointed independent administrators to oversee the cases and facilitate payments and legal processes. If two-thirds of the creditors, both in terms of number and amount owed, agreed to forgive the remaining debt, the debtor would be relieved of the obligation. This framework aimed to assist individuals in managing their debts and introduced a mediator to prevent creditors from hastily resorting to imprisoning debtors. It's important to note that this system had limitations, as only merchants were eligible to seek debt forgiveness through this process during the three years when the act was in effect.^[8]

Many of the commissioners appointed to oversee the bankruptcies did not keep track of all the information. When President James Monroe asked for a report on how this act had played out, many reported that they had either not kept their paperwork in order or did not have any to begin with.^[9] This allowed for a large amount of dishonesty and fraud. Administrators were able to pocket money or use it for other purposes with very little judicial oversight. Many debtors were not able to be released from their creditors even after their cases had been filed. In addition, many bankrupt individuals hid different assets that they owned to keep them from being taken or used to pay back the money that they owed. Those who were not eligible had no chance to work off the money, and even those who were eligible had to hope that their creditor would file the case and be willing to forgive the debt. In totality, many people were further thrust into debt, and the act did not serve the purpose of lowering economic failure for the nation. As a result, Congress repealed the act in 1803, two years before it expired.^[3][10]

The 1841 Act's revocation stemmed from the considerable administrative expenses, the absence of state law exemptions, and creditor dissatisfaction. Congress, pointing to the high costs and allegations of corruption, decided to nullify the 1800 Act. Over the ensuing three decades, it would be the responsibility of individual states to address the resulting legal vacuum.^[2]

• History of bankruptcy law in the United States
• Bankruptcy in the United States

• Original text of the bill from the Library of Congress.