Bankruptcy in the U.S. Constitution

228 years ago next month, the Constitutional Convention adopted the U.S. Constitution, which includes the Bankruptcy Clause.

You may have heard that the U.S. Constitution specifically refers to bankruptcy, making the filing of bankruptcies a function of the federal government.

The Bankruptcy Clause consists of only part of one sentence in the Constitution. It’s near the beginning, within a long list of legislative powers granted to Congress in Article 1 of the Constitution: “Congress shall have the Power… To establish… uniform Laws on the subject of Bankruptcies throughout the United States.” (Article 1, Section 8, Clause 4.) Here’s some of the interesting backstory to this

The Bankruptcy Clause Fits Right within Constitution’s Main Purpose

As you likely learned in school (and might even still remember!), before the Constitution our new country struggled during its first few years after gaining independence governed by the Articles of Confederation., which had created a weak central government. Each state could act pretty much like a sovereign country, with its own money, its mostly independent militia, and its own laws regulating trade with other states and even with other countries. There was no national court system and no executive branch to enforce the acts of Congress. The national government had no power to pass laws dealing with commerce among the states, including laws on bankruptcy.

At the heart of the issue at the Constitutional Convention of 1787 was how strong the national government should be. As limited of an issue bankruptcy may seem to be, it’s actually an important part of the laws of commerce—addressing the perpetual problem of how to deal with businesses and individuals who become insolvent, unable to pay their legal obligations. During colonial times and under the Articles of Confederation each colony or state could have its own laws on insolvency and bankruptcy. Because of how small the states were and how many there were, these different laws created intense confusion and conflict among the residents of the states, especially along the borders of the state. A national government with power over interstate commerce could avoid these conflicts through a single bankruptcy law uniformly enforceable in all the states.

Bankruptcy Almost Left Out of the Constitution

Nevertheless, the initial draft of the U. S. Constitution did not contain any reference to bankruptcy. So we almost ended up with a Constitution that would have made bankruptcy a function of state government, again with major differences and thus conflicts among those state laws.

But then towards the end of the Convention, the issue of bankruptcy went to a committee, which recommended the addition. The clause was adopted by the Convention by a vote of 9 states to 1. Only the state of Connecticut voted against it, because of a stated “concern that bankruptcies could be punished by death [!!], as was still the law in England. Connecticut also had a comprehensive bankruptcy law of its own, which it wanted to preserve free of federal control.” (From A Brief History of Bankruptcy Law, by Prof. Charles J. Tabb.