Bankruptcy - Research Paper Example

At times, due to poor planning or other reasons, debtors are unable to plan their financial transactions well, leading to an inability to honor their credits.Such insolvency or an inability to repay the creditors is known as “bankruptcy” (Newton 134). It is for times like these that bankruptcy laws have been instituted. Since the nineteenth century, bankruptcy laws have been continually formulated and improved with an insight not to discourage entrepreneurship in the region. There were three brief periods in which federal bankruptcy laws were implemented in the United States.

The first bankruptcy law was enacted in the 1800 called the “Bankruptcy Act of 1800” which was aimed to handle the situation of involuntary bankruptcy of traders (Hansen). During this period, the request for bankruptcy could be initiated by the creditor. This law was modeled after the English bankruptcy law. This law was abused by several debtors calling for “friendly” creditor initiations. Thus this law was repealed in 1803 (Skeel). After a long gap since 1803, the next bankruptcy law was passed in 1841 titled “Bankruptcy Act of 1841”.

In the meanwhile, states were following their own bankruptcy systems without the presence of a formal federal law. This act allowed the debtors to voluntarily file for bankruptcy and receive discharge of debt. Following this law, debtors continually opted for discharge of debt and the creditors were faced with immense problems. Therefore this law was also repealed within two years in 1843 (Skeel) on accounts of being abused and being oppressive for the creditors. It is important to notice that laws pertaining to debtor-creditor settlements have been important and their formulation has been exceptionally problematic.

If lenient laws were inculcated in the favor of debtors like the Bankruptcy Act of 1841, it posed risks and threats to the creditors and would have eventually led into the decrease of credit and ultimately affected commerce industry and economy. On the other hand, if too strict laws were enacted as were previously done – imprisonment to coerce payment of debt – it would discourage entrepreneurial ventures and experimentation on behalf of existing businesspeople. This means that failures which were converted into huge successes gradually would never have survived the law system (Hansen).

Thus striking the balance between the debtor and creditor rights without discouraging either has evolved over a century of deliberations. After the Bankruptcy Act of 1841 which was repealed in 1843, the country was distraught with the occurrence of the American Civil War of 1861. The northern ‘union’ and the southern ‘confederate states of America’ fought a bloody combat for four years which left most of the Southern America and their infrastructure destroyed (McPherson). The financial distress caused by the Civil War fueled the demand for the formulation of another bankruptcy law.

The next bankruptcy law was enacted in 1867 immediately after the end of the Civil War. The law was titled “Bankruptcy Act of 1867”. This law was longer lived than the previous laws but was nevertheless repealed in 1878 after 11 years of amendments and replacements. Bankruptcy Act of 1867 was more detailed and covered several situations. For the first time it was allowed voluntary bankruptcies for all individuals and not only traders and merchants