Banca Rotta: A Brief History of Bankruptcy Part Three

Click here for Part 1

Click here for Part 2

 

The Bankruptcy Act of 1984 (actually called the Bankruptcy Amendments and Federal Judgeship Act of 1984) created a new bankruptcy court system and added to the total number of district court and appellate judges; it changed/amended Code sections on consumer credit, it clarified bankruptcy rules for grain storage facilities and created a procedure for rejecting collective bargaining agreements in reorganization cases.

 

Eventually in this period the Chapter 12 was created – a type of bankruptcy aimed specifically at farmers and fishermen.

 

The primary reason for passage of the 1984 Act was to quell a constitutional problem of the 1978 Act, which was ruled on by the US Supreme Court in the case Northern Pipeline Construction Company v. Marathon Pipe Line Company, 458 US 50 (1982).  I’ll short-hand it to the Marathon case.

 

The Marathon case boiled down to the rights of the three branches of government: executive, legislative and judicial. Each branch jealously guards its territory and fights any encroachment. The Bankruptcy Act of 1978 was considered an encroachment into the Judicial branch by the Legislative.

 

The Court held that the rights Northern claimed against Marathon were created by contract and were thus created and ruled by state law. This means it’s rights were NOT created (and thus ruled) by the US Congress of the Legislative Branch. Under the 1978 Act, the Bankruptcy Courts were given the ability to hear and rule on (in legalese, they were given jurisdiction over…) all civil proceedings that involved a bankruptcy case.

 

Remember that Bankruptcy was created by Article I of the Constitution, but the Judicial Branch’s powers and abilities was created by Article III.

 

The Marathon Court ruled that although Congress does have the power to give authority to non-Article III judges (or magistrates or tribunals), it can only do so if the rights were created by federal statutes and laws (for example, the Tax Court system).

 

Here the Bankruptcy judges’ powers were encroaching on the power of their Article III brethren.

 

The Court gave Congress time to fix the problem and they did so with the Bankruptcy Amendments and Federal Judgeship Act of 1984.

 

The 1984 Act gave jurisdiction in bankruptcy cases to the District Courts and lowered or narrowed the authority of bankruptcy judges to that of adjuncts of the District Courts. Bankruptcy judges could issue orders/judgments only in cases under the Bankruptcy Code (Title 11), which are called “core proceedings” or cases directly involving bankruptcy issues. For “non-core” proceedings – or cases merely “related to” bankruptcy law – the bankruptcy courts would have to submit and propose their findings of fact and conclusions of law up to the district court, which would then issue any final order after their own review of the case.

 

To date the last major overhaul of the Bankruptcy Code was the Orwellianly-named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. This Act constituted a major change in the bankruptcy procedure: it instituted a maximum income limit in filing a Chapter 7 and detailed a mathematical system for determining the monthly payment in a Chapter 13 reorganization for those above the limit.

 

It also determined a test as to whether the amount and interest of a Creditor’s claim could be manipulated or changed (called a “cram down”) in a Chapter 13 reorganization.

 

Credit Counseling & Debtor Education classes were required of every Chapter 13 and non-corporate Chapter 7 Debtor. A new industry of financial education was thus created.

 

Incidentally, the title of this blog series? The word “Bankruptcy” comes from the Italian banca rotta meaning “broken bank”. Although it is likely apocryphal, a money changer would bust up or break apart the bench on which he did business to show his insolvency.

Image Copyright Steve Kelley

Original Material Copyright 2016 Michael Curry

***

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

Contact our Bankruptcy Attorney in Mount Vernon Illinois (also available for home visits in Centralia, Fairfield & Carmi) at 618-246-0993!

Banca Rotta: A Brief History of Bankruptcy Part Two

Click here for Part 1

The first Bankruptcy Law in the US was repealed in 1803 – it was designed as a temporary measure only. It would be forty years before another federal act was passed that allowed for debt relief.

 

Fortunately, imprisonment for debt was abolished in 1833. Unfortunately, the only relief a Debtor could get in the meantime came from an Order from a State Court staying collection of a debt. At this time a State Court could also eliminate any future debt owed (monthly contract payment, interest, etc.) but the US Supreme Court ruled that a State cannot discharge past debt and could not under any circumstances discharge the debt of a Creditor from another State.

 

Finally in 1841 another Bankruptcy Act was passed, again due to a financial crash, this time in 1837.  This Act was not limited to merchants but to all citizens. Filing for bankruptcy was now voluntary as well as involuntary (although involuntary bankruptcy was again limited to merchants). Although it was still an automatic liquidation of assets, a Debtor was allowed to keep some of his property. This Act was repealed in 1843; as with the earlier law, it was considered a temporary measure.

 

A letter at Abraham Lincoln’s Law Office Museum in Springfield, IL was on display. It was a letter from Lincoln to a client. It is about bankruptcy. He instructed his client to bring all his farm equipment and farm animals to the state capital on a certain morning for auction. He also reminded the client how much he still owed Honest Abe! They may change the displays every few months, but hopefully it is still there!

 

A third Bankruptcy Act was passed in 1867, against due to a financial panic – this time in 1857 – as well as the financial catastrophe of Civil War.  Northern creditors used the Act as a way to force Southern Debtors into a liquidation of assets.  Involuntary bankruptcies could now be filed against individuals. Corporations could file bankruptcy, as well. Creditors still had to approve the discharge, unless the liquidated estate paid 50% of the debt owed.

 

The 1867 law also allowed a Debtor to pay a percentage of the debts owed over a set period of time – the forerunner to the modern Chapter 13.

 

This Act was repealed in 1878.

 

The fourth and “permanent” Bankruptcy Act was passed in 1898. Although other Acts have been passed since, bankruptcy laws remained a part of the US Code ever since.

 

The Bankruptcy Act of 1898 was created due to another financial crisis in 1893 as well as the declining fortunes in the railroad industry.

 

The Creditor consent for discharge was eliminated and exemptions from asset liquidations could be based on an individual state’s laws. The Court, through appointed Trustees, could void preferential transfers (payments to insiders) and fraudulent transfers to bring those funds back into the bankruptcy estate. A Debtor could still offer to pay his creditors a percentage of the debt owed over time if the Creditors approved the proposed “Composition”, as it was called.

 

Through the years, the Act was changed or amended to say that some debts do not discharge and more “composition” laws were added for businesses and municipalities. Different kinds of bankruptcies were divided into Chapters.

 

It was replaced by a Bankruptcy Act of 1978. The 1978 Act added procedural and “mechanical” rules to the old bankruptcy code.

 

Due to the recommendations of the 1970 congressional Commission on the Bankruptcy Laws of the United States, the Act created bankruptcy courts, akin to Tax Courts, which served as adjuncts to the US District Courts for each federal judicial district.

 

Before that bankruptcy “referees” heard preliminary and other bankruptcy matters before federal district judges heard and ruled upon disputed matters.

 

The Act also created a formal US Trustee program through the Department of Justice. Earlier the Trustee voided illicit transfers. Now all cases were appointed a Trustee who kept the authority overlooking the liquidation and administration of a Debtor’s assets. Some states use “Administrators” with essentially similar powers.

 

Practically, the new code included a new kind of bankruptcy allowing corporations to pay back a percentage of its debt (the Chapter 11) as opposed to a complete liquidation.

 

Due to a Supreme Court ruling in 1982, the Bankruptcy Act of 1978 was forced to overhaul the administration of its duties. Failure to do so could result in the Bankruptcy Court’s utter elimination. It was the Judicial Branch’s equivalent of “git outta my yard, ya damn kids!”

 

I’ll discuss what happened in Part 3.

 

Copyright 2016 Michael Curry

***

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

Contact our Bankruptcy Attorney in Mount Vernon Illinois (also available for home visits in Centralia, Fairfield & Carmi) at 618-246-0993!

 

Banca Rotta: A Brief History of Bankruptcy (Parte the Firste)

Bankruptcy as a codified forgiveness of debt is at least as old as the Biblical book of Deuteronomy, which may have been first written in 1400 BCE.  Chapter 15 verses 1-3: “At the end of every seven years thou shalt make a release and this is the manner of the release: Every creditor that lendeth ought unto his neighbor shall release it; he shall not exact it of his neighbour, or of his brother; because it is called the Lord’s release. Of a foreigner thou mayest exact it again: but that which is thine with thy brother thine hand shall release.” (King James Version)

 

The Greeks had a more draconian version of debt “forgiveness” in debt slavery. If a debt was owed and not repaid, the Debtor and his entire family – children included – worked as a slave of the Creditor until the debt was paid off. Debtor slaves had more rights than non-Debtor slaves – for example, as to the right not to be physically harmed by their master.

 

The Code of Law created by Genghis Khan included provisions for bankruptcy.

 

The United States bases its federal rules and statutes on English law, as do most of the states except Louisiana. The first statute under English law dealing with bankruptcy was in 1542 under Henry VIII called the Statute of Bankrupts; An Acte againste suche persones as doo make Bankrupte.

 

The Statute allowed for the liquidation all of the Debtor’s possessions and paid his Creditors their proportional share based on their debt. It also allowed for imprisonment of the Debtor.

 

This law only applied to merchants who owed money through their businesses.

 

In 1705 the bankruptcy laws were changed to allow a discharge of the debts owed if the Debtor cooperated during the bankruptcy proceeding. A Debtor was even allowed to keep some of the funds from the liquidated estate.

 

Bankruptcy law was established in the United States by the Constitution in Article 1, Section 8, Clause 4. It gave the federal government exclusive control of bankruptcy laws and rules.

 

The first US bankruptcy laws were passed in 1800, and then only due to a financial crisis in 1797. It was similar to the British laws at the time: it was involuntary (a Creditor initiated the bankruptcy filing) and focused on businesses and merchants. A federal judge and two-thirds of the creditors had to approve the Debtor’s discharge. The Bankruptcy Act of 1800 was repealed in 1803 – it was a temporary act and due to expire after five years regardless.

 

It would be forty years before there would be another federal bankruptcy law.

 

I’ll talk about that in Part 2.

Copyright 2016 Michael Curry

***

About the author: Michael Curry of Curry Law Office in Mount Vernon, Illinois has helped thousands of individuals, family and small businesses in southern Illinois find protection under the Bankruptcy Code for almost twenty-five years. He is also available to help individuals and families with their estate planning (wills, power-of-attorney) and real estate and other sales transactions.

He is also the author of books on finance and bankruptcy available on Kindle through Amazon!

Whether you live in Mount Vernon, Salem, Waltonville, Woodlawn, Lawrenceville, Centralia, Louisville, Xenia, Grayville, Effingham, Dieterich, Vandalia, McLeansboro, Dahlgren, Albion, Flora, Clay City, Kinmundy, Chester, Sparta, Olney, Mount Carmel, Nashville, Fairfield, Cisne, Wayne City, Carmi, Grayville, or anywhere in Southern Illinois call Curry Law Office today at (618) 246-0993 and Finally Be Financially Free!

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