In honor of our nation’s 235 birthday yesterday, I thought it would be interesting to consider what bankruptcy entailed when our Declaration of Independence was written and signed. We should remember that those brave men who signed the Declaration, pledged “to each other our Lives, our Fortunes, and our sacred Honor.” Many did, in fact, give up their fortunes and went bankrupt as part of the fight for freedom.

Unfortunately, in 1776, the ability to write off debt and start over—as we have today—was non-existent. In those days, bankruptcy was considered more of a crime and there was little understanding or easy remedy. Usually, if you lost all your assets or your bills exceeded your income, creditors took everything and you were left virtually penniless. The law strictly favored creditors and the debtor was generally considered a criminal, even if he arrived there through no fault of his own. The perception was that the vast majority of people went bankrupt as a means to defraud their creditors, not because they were in trouble.

In England, you were usually sent to prison. In fact, the Bankruptcy Laws of both 1705 and 1732, the latter being still in force in 1776, authorized the death penalty for fraudulent bankruptcy.

In the US, the original federal laws, the Articles of Confederation, did not cover bankruptcy. Each state handled bankruptcy separately, so there were many different laws and procedures. When the Constitution was crafted, late in the process Charles Pinckney of South Carolina brought up the subject and  it was added to Section 8, the Powers of Congress. That clause reads, “To establish …uniform Laws on the subject of Bankruptcies throughout the United States.” However, Congress did not actually address this and create the first Bankruptcy Law until 1800.

In 1776, most places followed English law and you were generally either imprisoned or, at best, allowed to wander penniless.

Of the men who signed the Declaration, many lost their homes and their properties were destroyed by the British or by Tories. Some were able return to their homes and recover after the war, but many did not.

If you wish to read more about the signing and what the signers went through, there is a great little book (44 pages) by Merle Sinclair and Annabel Douglas McArthur that they have made available as a free PDF. It is called They Signed for Us.

The American Bankruptcy Institute tracks and reports on bankruptcies in the United States. They provide a lot of statistics on their site. For example, there are spreadsheets that show total filings with breakdowns for business and non-business for 2007-2010 and 2000-2006. These are available on their site at http://bit.ly/mDaCp1 along with many other interesting and useful statistics.

The human mind being what it is, looking at spreadsheet data can be painful and require a lot of effort to extract trend information and relationships. So I used their data to create a couple of bar charts.

The first shows total filings and total business and non-business (consumer) filings from 2000 to 2010. There is an obvious drop in 2006 due to the major changes in bankruptcy law that year. However, you can see that the trend is, unfortunately, upward since then and that we are back to the same totals we had in 2003-2005. It will be interesting to see if in the next few years, the numbers will decrease as the economy—hopefully—improves or if they will stay near the historical average (at least for this decade).

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