It is interesting that our Founders combined naturalization and bankruptcy into a single clause in the Constitution, but they did so because, with both issues, they needed to move away from 13 different laws and create a nationally agreed-upon setup of rules. Article I, Section VIII, Clause IV states, “To establish a uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States.” As I focused on naturalization last month, I want to look at bankruptcy.
Before the Constitution, bankruptcy and debt problems were handled by individual colonies and later by the states. These laws were influenced by English bankruptcy laws. In England, bankruptcy laws were mainly designed to help creditors collect money from debtors. Creditors could force debtors into bankruptcy if they could not pay their debts. The debtor’s property could then be sold, and the money would be divided among creditors. Debtors who could not pay their debts often faced harsh punishments, including imprisonment. Clearly, this would not work today as we do not have enough prisons available to hold everyone in debt.
The purpose of a national bankruptcy law was to create fairness and consistency amongst the states. While influenced by British laws, American laws were changing as the governments focused more on helping struggling debtors instead of creditors.
During the Constitutional Convention, the Framers decided that the federal government needed bankruptcy power. They believed that a national system would prevent problems when debtors or their property moved between states. While they were often leery of too much federal power, they believed bankruptcy was closely connected to Congress’ power to regulate commerce and would help prevent fraud between states.
The first federal bankruptcy law was passed in 1800; however, Congress did not create a permanent bankruptcy system right away. During most of the 19th century, bankruptcy laws were still left to the states because Congress repealed its bankruptcy laws as fast as it passed them. Without federal law, the rules were left to the states.
As national laws developed, they again focused more on the protection of debtors than creditors. Over time, Congress expanded the meaning of bankruptcy. For example, voluntary bankruptcy became possible, allowing individuals to seek bankruptcy protection instead of only being forced into it by creditors. Bankruptcy laws also began allowing businesses to reorganize instead of simply selling all their property. These changes showed that bankruptcy was not only about collecting debts but also about helping people and businesses recover financially. Congress has tried to create laws that balance the needs of both sides. The modern bankruptcy system allows debtors to receive relief while also protecting creditors’ rights.
Over the years, the Supreme Court has weighed in on the Bankruptcy Clause. Even though Congress has broad bankruptcy power, there are limits. Congress cannot create bankruptcy laws that violate constitutional protections. Bankruptcy laws cannot unfairly take away a person’s property rights without proper legal protection. Congress also must follow the requirement that bankruptcy laws be “uniform.” This means bankruptcy laws must apply across the country in a consistent geographic way. However, uniformity does not mean every person in every state must have exactly the same outcome. Congress can recognize differences between states, such as different property laws or exemptions.
The current federal bankruptcy system comes from the Bankruptcy Reform Act of 1978. The Act expanded who could file for bankruptcy and allowed individuals to voluntarily seek bankruptcy protection. It also introduced stronger options for businesses to reorganize instead of being forced to close, giving them a chance to continue operating while paying their debts.
While the laws have not changed much since 1978, one of the biggest changes came in 2005 with the Bankruptcy Abuse Prevention and Consumer Protection Act. This law made it harder to file for Chapter 7 bankruptcy, which typically does not require a debtor to repay their creditors. The law also required some people to use Chapter 13, where they repay part of their debt over time. The 2005 law also added a test to look at a person’s income and expenses before allowing certain types of bankruptcy.
The main point of the clause was not so much how Congress decides bankruptcy cases, but, like naturalization, that it be unified between the states as not to cause difficulties between them.
James Finck is a professor of American history at the University of Science and Arts of Oklahoma. He can be reached at james.finck@swoknews.com. Thanks to the Southwest Ledger and the Lawton Constitution for sharing his column.
