Article on Bankruptcy Reform and Original Understanding of the Bankruptcy Clause:

Very informative and balanced article by Julie Reynolds in the latest issue of the DC Bar Magazine here. She interviewed me for the article.

My only quibble with this excellent piece is that there is a common mistake at the outset, which is that the Bankruptcy power in Article I, sec. 8 of the Constitution was not actually put into the Constitution just to help debtors. This is usually quite surprising to most people. It was actually put there in large part to help creditors as well--like the Contracts clause, Fair Faith and Credit, and prohibition on state issuance of paper money, Congress's power to "enact uniform laws on the subject of bankruptcies" was designed to enable creditors to collect interstate debts more easily and to eliminate the power of state legislatures to try to discharge the debts of their residents (as often was the case during the Articles of Confederation era). In particular, states used their laws to pass pro-farmer laws that interfered with the ability of banks to collect on farm loans and vesting the Bankruptcy power in the federal government was an effort to restrict the excesses of state legislatures under the Articles.

So, while to modern sensibilities we have come to think of bankruptcy as being primarily about the benefit of the discharge to debtors, under the original understanding of the Bankruptcy clause, it was to a large extent a pro-creditor provision as well. To the extent that it benefited debtors as well, it was primarily intended for commercial debtors such as New England merchants, not what we would today call consumer debtors. In fact, some states retained debtors' prisons for consumer debt well into the 19th century.

The argument is actually more complicated that that and turns to some extent on an interesting linguistic debate over the meaning of the term "bankruptcy," which may have had a very specific meaning at the time, applying only to business, not personal insolvency. For centuries, under English common law, only merchants and traders could be declared "bankrupt," which enabled them to have their debts discharged upon the satisfaction of certain requirements. By contrast, non-merchants had to seek refuge under "insolvency" laws, which did little more than to release a debtor from debtor's prison but did not discharge the debtor from his indebtedness. Thus, many understood the Constitution's grant of power to Congress to regulate "bankruptcies" as creating federal power to regulate only with respect to merchants and traders and not with respect to those individuals traditionally subject to "insolvency" laws, which remained under State control. Others argued that this traditional distinction between had disappeared by the mid-Eighteenth century, such that by the time of the Constitution, the terms became interchangeable so as to give Congress the power to regulate all insolvent debtors.

So for originalists, the open question is whether the traditional distinction was still valid at the time of the Constitution. For the Supreme Court, by contrast, the issue was resolved in 1819 when it ruled that the term "bankruptcy" was not a term of limitation, thus Congress could regulate in both realms (although Congress chose to do so only sporadically during the 19th century, leaving debtor-creditor relations mainly to the states).

I actually have a short essay coming out on the original understanding of the Bankruptcy Clause (as well as the Coinage Clause) but the volume in which it is to be published has been long delayed. Here's an excerpt from that essay on the original understanding of the Bankruptcy Clause:

The Bankruptcy Clause of the Constitution was one Congress's several delegated powers in Article I, Section 8 that were designed to encourage the development of a commercial republic and to temper the excesses of pro-debtor State legislation that proliferated under the Articles of Confederation. Under the Articles of Confederation, the States alone governed debtor-creditor relations, and that led to diverse and contradictory State laws. It was unclear, for instance, whether a State law that purported to discharge a debtor of a debt prohibited the creditor from trying to collect the debt in another State. Pro-debtor state laws also interfered with the reliability of contracts, and creditors confronted still further obstructions in trying to use State courts to collect their judgments, especially when debtors absconded to other states to avoid collection.

A coherent and consistent bankruptcy regime for merchants was also required for the United States to flourish as a commercial republic. The Bankruptcy Clause helped to further the goals of uniformity and predictability within the federalist system. As James Madison observed in Federalist Number 42, "The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States that the expediency of it [i.e., Congress's power to regulate bankruptcy] seems not likely to be drawn into question." As Madison suggests, there was little debate over and little opposition to the bankruptcy clause at the Philadelphia convention. Although State law continued to govern most routine debtor-creditor relations, Congress had the authority to override State laws dealing with insolvency.


To clarify the federal-state balance perhaps contemplated by the originalist theory described (which, as noted, remains open to contention)--under this theory Congress could enact "bankruptcy" laws (dealing with discharge of debt) and the states would remain in charge of enacting "insolvent" laws (which historically dealt with release of debtors from debtor's prisons). In Sturges v. Crowninshield (1819) Justice Marshall basically punted the originalist question and held that even if the dividing line between the two was contemplated in Art. I sec. 8, it would be too difficult for the Supreme Court to enforce the line judicially.

Related Posts (on one page):

  1. More on Original Understanding of the Bankruptcy Clause:
  2. Article on Bankruptcy Reform and Original Understanding of the Bankruptcy Clause: