The Purpose of Bankruptcy in the U.S. Constitution

The most respected early commentator on the Constitution fills in some historical gaps about bankruptcy and leads it in a better direction.

 

Joseph Story was born during the Revolutionary War, was nine years old when the U.S. Constitution was ratified in 1789, became a Justice of the U.S. Supreme Court when he was only 32 years old, and wrote the most respected early treatise on the Constitution, the three-volume Commentaries on the Constitution of the United States.

As discussed in a couple blogs a month or so ago, the Constitution itself has only one sentence—actually just part of a sentence—about bankruptcy. This clause simply grants to Congress the power to “establish… uniform laws on the subject of bankruptcies throughout the United States.” And among all 85 of The Federalist Papers—written by proponents of the proposed Constitution pushing for its ratification—there was only one sentence on bankruptcy. The gist of that sentence: since we need a national government to address our grave problems of interstate commerce, it only makes sense that the bankruptcy law be national as well.

But beyond merely saying bankruptcy law needs to be national, neither of these say anything about the appropriate purpose of such a law.

That gap was addressed in a remarkable single, long paragraph by Joseph Story in his Commentaries (see Section 1101). Although the language shows its age—it was written nearly 180 years ago—it is quite readable, the archaic language making it all the more interesting and even entertaining in spite of the topic’s seriousness:

   The subject [of bankruptcy] deserves a more exact consideration [than was given by The Federalist Papers]. Before the adoption of the constitution the states severally possessed the exclusive right, as matter belonging to their general sovereignty, to pass laws upon the subject of bankruptcy and insolvency…. [T]he general object of all bankrupt and insolvent laws is, on the one hand, to secure to creditors an appropriation of the property of their debtors pro tanto to the discharge of their debts, whenever the latter are unable to discharge the whole amount; and, on the other hand, to relieve unfortunate and honest debtors from perpetual bondage to their creditors, either in the shape of unlimited imprisonment to coerce payment of their debts, or of an absolute right to appropriate and monopolize all their future earnings. The latter course obviously destroys all encouragement to industry and enterprize on the part of the unfortunate debtor, by taking from him all the just rewards of his labour, and leaving him a miserable pittance, dependent upon the bounty or forbearance of his creditors. The former is, if possible, more harsh, severe, and indefensible. It makes poverty and misfortune, in themselves sufficiently heavy burthens, the subject or the occasion of penalties and punishments. Imprisonment, as a civil remedy, admits of no defence, except as it is used to coerce fraudulent debtors to yield up their present property to their creditors, in discharge of their engagements. But when the debtors have no property, or have yielded up the whole to their creditors, to allow the latter at their mere pleasure to imprison them, is a refinement in cruelty, and an indulgence of private passions, which could hardly find apology in an enlightened despotism; and are utterly at war with all the rights and duties of free governments. Such a system of legislation is as unjust, as it is unfeeling. It is incompatible with the first precepts of Christianity; and is a living reproach to the nations of christendom, carrying them back to the worst ages of paganism. One of the first duties of legislation, while it provides amply for the sacred obligation of contracts, and the remedies to enforce them, certainly ispari passu, to relieve the unfortunate and meritorious debtor from a slavery of mind and body, which cuts him off from a fair enjoyment of the common benefits of society, and robs his family of the fruits of his labour, and the benefits of his paternal superintendence. A national government, which did not possess this power of [bankruptcy] legislation, would be little worthy of the exalted functions of guarding the happiness, and supporting the rights of a free people. It might guard against political oppressions, only to render private oppressions more intolerable, and more glaring.

(The italicized bold added for emphasis.)

For centuries up to this time Story wrote this, and to some extent even for decades afterwards, the main point of bankruptcy laws was to provide a mechanism for creditors to force debtors to pay them. So Joseph Story’s strong language in support of fairness, compassion, and economic practicality in providing debtors a fresh start marks an important turning point here early in the history of American bankruptcy law.  

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