What Is the Purpose of the Constitution Giving Congress the Power to Regulate Bankruptcy?

The Origins of Bankruptcy

• According to Professor Charles J. Tabb, at the time the constitution was drafted, the framers envisioned a system of bankruptcy laws similar to the English system, which originated in 1542. Historically, English bankruptcy laws sought to avoid the historical travesties once imposed on debtors, such as imprisonment and the alleged Roman practice of butchering debtors. In particular, the English laws sought to restore the creditors and provide merchant debtors an opportunity to redeem themselves, although debtors for many years were not entitled to a discharge. Creditors could seize the debtor's assets, sell them and then continue to attempt to collect from the debtor. Bankruptcy laws applied only to merchant debtors because credit, which was viewed as immoral, was also considered a necessary evil within business.
  
  

The Evolution of Bankruptcy

• In 1705, English bankruptcy law introduced the concept of the discharge for merchant debtors. Individuals, however, would not become eligible for bankruptcy for another century. As attitudes changed about credits, in the 18th century, so too did attitudes about bankruptcy. The 1732 Statute of George II, which embraced the more lenient attitude, allowed for discharge and property exemptions, was the statute to which the Framers modeled the first bankruptcy law in 1800.
  
  

The Enactment of the Bankruptcy Clause

• In his Commentaries on the Constitution, Justice Joseph Story explains that bankruptcy provided a means to an end for insolvent debtors with nothing left to yield to their creditors. A national government which lacked the ability to legislate bankruptcy matters would be incapable of protecting insolvent debtors enslaved by their past debts. In turn, such a government could not then guard the happiness and support the rights of a free people.
  
  In No. 42 of the Federalist Papers, James Madison explained that uniform bankruptcy laws were intimately connected to the regulation of commerce and essential for preventing fraud among creditors and debtors from different states.
  
  

Seeking Uniformity

• At the time the Constitution was enacted, states had their own bankruptcy laws. By granting Congress the authority to legislate bankruptcy, Congress could ensure a uniform approach. Story argues that in doing so, Congress could avoid the many potential pitfalls of a nonuniform set of laws, such as differing punishments and relief for defaulting debtors. Further, Story argues that the drafters were concerned that a state might give undue preference to certain creditors, instead of providing a pro rata share among all creditors. Further, local laws might result in gross injustice and inequality, which could encourage interstate feuds. Another concern was that out-of-state creditors might not be bound by the bankruptcy laws of that state and that debts might be out of reach of the state.