The issue of bankruptcy became increasingly important during the 1780s and 1790s as the U.S. economy came to rely more and more on speculative commercial transactions. Traditionally, bankruptcy was seen as a result of moral failure, and it was assumed that a debtor could never escape the debt because he had a moral obligation to fulfill commitments to all creditors. Imprisonment for debt was an instrument of coercion intended to get the debtor and his or her relatives and friends to fulfill those obligations. Bankruptcy entailed a new approach to debt wherein debt became merely a function of economic failure, allowing the debtor to erase an insolvency by simply dedicating all existing assets to creditors pressing a claim. With the financial slate wiped clean, a person could once again enter the world of business without worrying about the old debts. An economic system with bankruptcy laws would thus encourage investment and the development of capitalism.

Before the American Revolution, a few colonies had some debtor relief and bankruptcy laws. During the 1780s Pennsylvania and New York passed more significant bankruptcy legislation geared mainly to the commercial interests. However, it was only in the 1790s that there was a national debate on bankruptcy. The U.S. Constitution gave Congress the power to establish "uniform Laws on the subject of Bankruptcies throughout the United States." All efforts at passing such legislation foundered on the issue of the morality of debt until the Bankruptcy Act of 1800 was passed by a Congress dominated by the Federalist Party. The 1800 law stipulated that bankruptcy proceedings were limited to merchants, bankers, brokers, factors, underwriters, and marine insurers and had to be initiated by a creditor who was owed at least $1,000. The creditor petitioned a federal district judge stating that the debtor had committed one or more acts of bankruptcy--absconding, hiding, avoiding arrest, concealing property, conveying property fraudulently, escaping from debtors' jail, or remaining in debtors' jail for more than two months. The judge would then establish a commission that would tally up the person's property and the claimed debts. The debtor would have to undergo at least three examinations in 42 days and make full disclosure of his property. Once this process was completed to the satisfaction of the commissioners and two-thirds of the creditors owed $50 or more, then the debtor was released from any obligation and free to begin his life over again. Obviously the law favored the rich. Robert Morris was the most spectacular beneficiary of the Bankruptcy Act when his prosecution as a bankrupt freed him from debtors' jail and $3 million owed to creditors.

The Bankruptcy Act did not have much longevity. The Democratic-Republican Party opposed the law and, with the help of members of the Federalist Party who thought the legislation was deficient, repealed the bill in December 1803.

Bibliography:

Bruce H. Mann, Republic of Debtors: Bankruptcy in the Age of American Independence (Cambridge, Mass.: Harvard University Press, 2002)

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