The first personal bankruptcy laws began in Great Britain more than four hundred and fifty years ago - of course, those statutes forced the bankrupt to infamous debtor's prisons (could've been worse; the Roman Empire forced insolvent debtors to be slaves of their creditors). Throughout most of western civilization, inability to repay bills was considered the same as fraud and debtors were absolutely considered criminals - often sentenced to death.
Things really didn't start to change until the English economy began a period of expansion in the 1600's. As more and more credit opportunities started to become available, there was a growing notion that unsavory credit practices could take advantage of debtors. Around the turn of the seventeenth century, new laws began to differentiate between the unfortunate and the criminally-inclined, and the very image of debtors began to change in social imaginings. After the massive depression following the Seven Years War in 1760, well-regarded stalwarts of the emerging middle class found themselves unable to repay loans and bankruptcy began to be seen as a sad (but ethical) necessity.
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In America, after early colonial laws saw debtors punished by branding (T for Thief burnt onto thumbs) and public floggings, the first article of the United States Constitution provided vague guarantees of "uniform laws" for bankruptcy protection - though the first law wasn't passed until 1800 and that still contained a number of restrictions to prevent coverage. Under this law, bankruptcy hearings could only be called for by the creditors themselves, debtors had to be part of specific industries, and debts had to total a (relatively large for the day) balance. Even with all of these statutes, many debtors still successfully eliminated their debts and the 1800 law was repealed three years later, and, despite another attempt in 1841, no bankruptcy protection that modern consumers would recognize existed until 1867. Things weren't perfect - administrative fees were so large that the creditor wouldn't receive any funds and homestead exemptions varied widely from state to state - but, for the first time, desperate debtors had some recourse from spiraling bills.
After nine years, the 1878 law was also repealed, but the writing was on the wall. Even the bro-business lobby was arguing that creditors should have some protection from the state. Finally, in 1898, the bankruptcy legislation that largely has survived til modern times, was enacted - all debtors, corporations and ordinary individuals were protected, and all debts, even ones preceding the law, could be eliminated. The new procedures were far more similar to legal hearings than previous states' administrative meetings; this allowed debtors suffering involuntary proceedings to be guaranteed jury trials but, as you'd expect, necessitated the rise of bankruptcy attorneys as well.
Over the next few years, several new changes appeared within the bankruptcy laws. In 1902, state exemptions to the overall legislation was allowed, and, in 1902, debtors were limited to declaring bankruptcy only once every six years (this was later extended to seven). 1978 finally reformed the original act, separating provisions to Chapter 7, 11, and 13 to a variety of possible debt payment plans or overall liquidation attempts for consumers and businesses (a few years later, Chapter 9, intended for municipalities and parts of local government, and Chapter 12, meant to aid privately-held family farms, were also on the books).
Most modern debtors, of course, are most curious about the effects of 2005's Bankruptcy Abuse Prevention & Consumer Protection Act. While the statutes offering assistance to businesses were largely unchanged, legislators went to work undermining the Chapter 7 and Chapter 13 protection available to average consumers. Now, six months before they can even attempt to file for bankruptcy, borrowers must meet with consumer credit counseling agencies and, before bankruptcy discharge, must take a debt-management class with significant fees that the borrowers themselves must pay. In addition, borrowers must have their finances subjected to a new 'means test' that makes qualification for the debt liquidation potential of Chapter 7 increasingly impossible. Under the new law, courts may independently switch a Chapter 7 to Chapter 13, dismiss any bankruptcy filings at any time, and even impose sanctions upon debtors and their attorneys for bankruptcy declarations considered unnecessary (including reimbursement for legal costs.
Compared to recent years, it's much more difficult for average consumers to declare bankruptcy and eliminate debt-loads (compared to the eighteenth century, of course, we're still blessedly free from branded thumbs and ears nailed to pillories). Chapter 7 protections are still necessary for those debtors that have suffered severe hardships - unemployment, medical emergencies - without sufficient savings or assets, but, considering the punitive treatment of Chapter 13 cases under the 2005 legislation, it's probably wise for most borrowers to at least consider another alternative to avoid bankruptcy altogether. Debt settlement, for instance, negotiates debt liquidation for up to fifty percent of total balances - similar to what's available for Chapter 13 bankruptcies - but without the traumatic effects upon credit reports and Fico scores. It's a new industry, but, as legislative restrictions make it harder and harder for most debtors to file for bankruptcy, debt settlement should likely have a long and vibrant history of its own.
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