The Point of Bankruptcy in the U.S. Constitution: Fairness and Compassion

The most important early source on the Constitution explained the purpose of having bankruptcy in the Constitution.

Bankruptcy in the Constitution

The U.S. Constitution itself has just a few words, only part of a sentence, about bankruptcy. Congress is simply granted the power to “establish… uniform laws on the subject of bankruptcies throughout the United States.”

The Federalist Papers

The most important contemporary source about the Constitution, the Federalist Papers, didn’t shed much light on those few words. The proposed Constitution had been agreed upon but needed to be ratified by the states. The Federalist Papers were a series of 85 letters published in New York newspapers during 1787 and 1788 by proponents of the proposed Constitution pushing for its ratification. Totaling hundreds of pages there was only one sentence on bankruptcy. The gist of that sentence was simply that since we need a national government to deal with serious problems with interstate commerce under the Articles of Confederation, the bankruptcy law should be national as well.

But beyond simply saying bankruptcy law needs to be national in scope, neither the Constitution itself nor the Federalist Papers said anything more about the purpose and nature of such a law.

Commentaries on the Constitution

That gap was addressed by someone who was born during the Revolutionary War and became a Justice of the Supreme Court when he was only 32 years old, Joseph Story, the author of the highly influential three-volume Commentaries on the Constitution of the United States, published in 1833.

Here is the heart of what he wrote, with some explanation as we go to make it more understandable:

[T]he general object of all bankrupt and insolvent laws is, [beyond liquidating debtor’s assets in return for] the discharge of their debts, 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.

In other words bankruptcy laws should free people from going to debtors’ prisons and from getting their wages garnished until all their debts were paid.

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.

Garnishing forever takes away a person’s motivation to work and leaves too little to live on.

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.

Debtor prisons are indefensible, except in the case of fraud by a debtor.

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.

Debtor prisons go against our deepest principles; they are unfair and cruel.

One of the first duties of legislation, while it provides amply for the sacred obligation of contracts, and the remedies to enforce them, certainly is, [equal in all respects], 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.

While laws do need to provide for the enforcement of creditor contracts and the means for creditors to collect on debts, laws also need to provide for relief from those debts for the “honest and meritorious debtor.”

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.

Although the main point of a constitution may be to “guard against political oppressions,” it should also guard against the “private oppressions” of creditors. See Commentaries on the Constitution of the United States (Section 1101).

Quite powerful stuff. For centuries up to this time, and 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 early in the history of American bankruptcy law.