A HISTORY STORY BANKRUPTCY FROM THE BEGINNING MYTH AND FACT
December, 8, 2010
This History of Bankruptcy
For more than 30 years the firm of Alford & Bertrand, LLC has been representing individuals and companies in need of financial protection as a result of downturns in the economy, business setbacks, unemployment, illness and various other factors beyond the control of the debtor which have created a need for a fresh financial start. The firm has also represented creditors who have suffered financial losses as a result of debtors who have been permitted, by law, to avoid the payment of debts, personal and commercial. A common thread of thought runs through the minds of those seeking bankruptcy protection and those who feel victimized when they discover that they cannot collect debts which were incurred by debtors engaging in legitimate commercial and consumer transactions.
From the debtors point of view the thought may be formulated by the following questions:
Why should I be able to walk away from obligations which I incurred?
Is it immoral to file bankruptcy and leave my creditors holding the bag?
Does filing a bankruptcy mean that I am showing a lack of character?
Creditors, particularly small businesses and those not engaged in financial enterprises make the following inquiry:
I provided the goods and services why aren’t I entitled to payment?
The debtor received the services or goods why shouldn’t they have to pay?
Why are peoples and companies allowed to file bankruptcy?
Having provided consultation for literally thousands of individuals over the past three decades I have found that the vast majority of individuals considering bankruptcy come to the thought with major feelings of guilt and inadequacy and take no pleasure in discharging their obligations. Many debtors find the “guilt” factor the stumbling block that prevents them from acting when they are legally and financially entitled to. On the side of the coin creditors will often express the belief that they are the victims of malicious and immoral behavior at the hands of insolvent debtors who seek bankruptcy court protection and are under the impression that their debtors obtain relief with pleasure.
I write this article in an attempt to dispel both the debtor’s and creditor’s myths about one another. Please understand that there are exceptions to all generalities and the following opinions apply to most but not all of individuals and businesses that find themselves becoming involved, voluntarily or involuntarily in the world of bankruptcy debt relief and protection.
Mr. or Ms Debtor you are not committing an inherently evil or immoral act if you are in legitimate need of bankruptcy protection, exercise your rights in good faith and in accordance with the law, and seek Court protection as a last resort for circumstances that do not lend themselves to resolution in any other manner.
Mr. or Ms Creditor your customer, client or debtor is not pleased to rid him or herself of the obligation which they have incurred. Your debtor is having sleepless nights due to this decision and will have years of credit mending to place themselves in the same position that they were before filing. I don’t want to suggest that they are as unhappy as you are to be free of their debt to you but I assure you they are not pleased either.
To understand the answer to the questions often asked about the justification for bankruptcy relief one has to look at our shared history and historic customs and practices. One finds the concept of forgiveness of debt as far back as Biblical times. In the era of Moses the Hebrew Scriptures (The Old Testament) we learn of the Jubilee. According to Scripture there was a Holy Year once every fifty years and at that time all debt would be eliminated. In other words every debtor had a fresh financial start which is now the stated purpose of a bankruptcy filing. In a manner not dissimilar to the way in which bankruptcy laws have been amended since becoming modern law the concept of a fresh financial start during the Biblical era was also amended. In the Book of Deuteronomy it is stated “At the end of every seven years you must cancel debts. Every creditor was required to cancel loans made to fellow countrymen and could not require payment of the debt.
If we now bring ourselves forward several thousand years you will find the first official laws concerning bankruptcy passed in England in 1542 under King Henry VIII. At that time a bankrupt individual was considered a criminal but as time passed bankruptcy laws became more humane as nation states (Spain four times between 1557 and 1596 declared state bankruptcy). In the early 18th century the law changed and provided that debts that could not be paid by individuals would be discharged in exchange for the debtor’s agreement to pay what they could. These were the first laws that we would find recognizable in accordance with today’s standards. These laws were not enacted for humanitarian purposes but were enacted to allow individuals to reengage in the economic marketplace rather than go underground, or worse, into debtor’s prison.
In the United States the first Federal Bankruptcy Law was enacted in 1800 as a temporary act in response to an economic crisis caused by uncontrolled land speculation and the ensuing crash of the real estate market (Does this sound familiar?). Once the market stabilized this law was repealed in 1803. In 1837 there was a financial “Panic” that which we now call a recession or depression and a new bankruptcy act was passed in 1841 to create a means for creditors to force liquidation by debtors and payment of obligations. This was a law that was clearly designed to benefit the creditors and not the debtors.
It was not until 1898 that bankruptcy laws were enacted that were designed to create the opportunity for debtors to receive protection from creditors. As the economy had its ups and downs the bankruptcy laws continued to evolve and debtors continued to receive more attention and protection for the purpose of allowing them the opportunity to reestablish themselves in the world of commerce. To the modern person or company which finds itself seeking Court protection perhaps one of the most important statements defining the role of bankruptcy was made in a United States Supreme Court decision in 1934. The Court stated the primary goal of bankruptcy was to offer debtors a ‘fresh start” from financial burdens. The Court further states “It gives to the honest but unfortunate debtor . . . a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
There have been numerous changes and amendments to the Bankruptcy Code since 1934. Since 2005 efforts have been made to create a system in which more individuals file petitions under Chapter 13 of the Code requiring at least a partial payment of debt over a period of up to five years In lieu of Chapter 7 which acts to fully discharge unsecured debt the general ‘fresh start” theory remains intact for those who fall below certain income levels. For those whose income is in excess of certain Internal Revenue Service established limits individuals can enter into payment plans which can reduce their payments substantially by discharging a significant portion of their debt, often requiring payments as low as 5% of the total debt payable over five years, and discharging the obligation to pay enormous amounts of interest often charged by credit card companies that can run as high as 31% per year. Payment can be made over a period of up to five years which will often provide sufficient relief for debtors to enable them to get on with their lives and be relieved of the excessive burden which has hobbled their ability to deal with financial setbacks.
Since the Bankruptcy Reform Act of 2005 the pendulum has swung back to provide the creditors with more protection than they had in the recent past. Notwithstanding these modifications Bankruptcy protection remains available to provide Debtors with protection in times of economic distress. Because of the large numbers of bankruptcies now being filed many attorneys with little background in bankruptcy are jumping into the field with a minimum of experience and expertise. If you need an attorney, either as a creditor or a debtor, make certain to engage one who has been there during the good economic times and the bad. Make certain to engage one who understands bankruptcy law from both the standpoint of the people in debt and people who are the providers of credit. Make certain to engage one who will consult with you about your financial issues and give you the information that you need to make an educated decision before you act.
