Debt's Dominion: A History of Bankruptcy Law in America

Abstract

The American approach to personal and corporate bankruptcy is unique in the world, providing the most generous provisions for canceling an individual's debts. Corporate debtors are given more flexibility than anywhere else to renegotiate their obligations and start over. Why did American bankruptcy diverge in almost every conceivable respect from its antecedents in English law and from the current English system? These questions have taken on great importance as other nations increasingly look to the U.S. in reforming their own insolvency and business regulation.

This volume draws on the insights of a wide range of disciplines, including political science, economics, law, and history, to explain the remarkable history of U.S. bankruptcy law. The distinctive contours of U.S. bankruptcy law are seen as emerging from the confluence of three political factors: the growth of an organized creditor lobby; the countervailing pressure of pro-debtor ideological currents whose influence is magnified by American federalism; and the emergence of an increasingly powerful bankruptcy bar.

These factors explain why, in the 19th century, large-scale corporate reorganization, which began with the railroads, developed in the courts rather than in Congress, and why Congress failed to enact a permanent bankruptcy law until 1898. Political analysis also explains how future Supreme Court Justice William Douglas and his New Deal allies persuaded Congress to usher Wall Street out of large-scale reorganization in the 1930s; and why Douglas's New Deal vision was completely repudiated when Congress overhauled the bankruptcy laws once again in 1978. The same tools are used to demonstrate that a fiercely divided bankruptcy commission and the 1994 Republican takeover of Congress are responsible for the recent, ideologically charged battles over consumer bankruptcy. In summary, this analysis shows that the same political factors have continued to shape America's unique response to financial distress, from the origin of our bankruptcy laws through to the present day.