Federal Bankruptcy Act of 1800

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    • U.S. bankruptcy law originally based itself on English bankruptcy law dating back to the 16th century, which protected creditors, not debtors, from loss. Creditors had the right to request bankruptcy of a debtor to seize assets and force their sale. Individuals were not included in these bankruptcy laws --- only merchants and traders. Individual debtors unable to pay often found themselves imprisoned or severely punished. Some were even sentenced to death.


    • In the late 1700s, the United States was in a depression. Many businesses were unable to pay their debts because of the economic crisis. Several of the nation's founders, such as Robert Morris, still held heavy debts from the Revolutionary War and the subsequent currency collapse. Congress responded by exercising its constitutional power to deal with the crisis. The result was the Bankruptcy Act of 1800, a temporary measure meant to exist for five years.


    • The act established federal guidelines for the creation and administration of bankruptcy proceedings across the nation, asserting federal law over state bankruptcy laws of the time. The act applied to merchants, traders and brokers and allowed involuntary bankruptcy by their creditors, but debtors could often get friendly creditors to file for bankruptcy on their behalf. The act also forgave debtors such as Robert Morris.


    • The U.S. district courts administered the bankruptcy proceedings that resulted from this law. Once a creditor filed bankruptcy, the assets of the debtor were sold and split among his creditors. Any remaining debts were discharged, or forgiven, with the consent of two-thirds of his creditors. Certain assets, such as personal property, were exempt from sale and distribution. Fraudulent bankruptcies were punishable with a prison term between one and 10 years. The act expressly excluded the death penalty as a punishment for a fraudulent bankruptcy filing, in opposition to English bankruptcy law at the time.


    • Congress repealed the law in 1803 amid complaints. The nation was prosperous again and the need for a federal bankruptcy law had outlived its usefulness. Critics complained that the administration of the law was too expensive, travel to federal courts for administration of the law was too costly and time consuming and it was too easy to commit fraud under the law. These same complaints followed several other temporary federal bankruptcy acts in the 1800s until the enactment of the Bankruptcy Act of 1898, the nation's first permanent federal bankruptcy law.

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