Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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New York: Maynard, Merrill, and Co.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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BANKRUPTCY. The constitution of the United States gives power to congress to establish uniform laws on the subject of bankruptcies throughout the United States. When the constitution was adopted, the English law divided the general subject into two parts, insolvency and bankruptcy; which were administered by different courts, and to some extent upon different principles. The insolvent law was applied to persons who were imprisoned for debt, and who asked for a discharge from prison upon a surrender of all their property; the bankrupt law was applied only to traders, and always upon the suit of their creditors against them—never upon the application of the debtors. Not only the person but the debt was discharged. In respect to surrender of property and its division among the creditors, the two systems were alike. It was strenuously insisted in congress, in 1840, that the word "bankruptcies" in the constitution was to be under stood in a technical sense, and that the legislature had no power to provide a system of bankruptcy for persons who were not traders, nor to permit debtors to begin the proceedings by their own voluntary petition. This opinion has not prevailed, either in congress or in the courts. It is now fully established that the grant of power is broad enough to permit congress to provide for the settlement of the affairs of all insolvent debtors. At the same time a statute of bankruptcy practically is part of the commercial law, and is hardly needed in purely agricultural communities.


—The power of congress over this subject has been exercised but three times, in 1802, 1840 and 1867. The two former acts were short lived, the last was in operation eleven years, and since its repeal many of the merchants of the country have discovered that it was highly useful and they are trying to procure the enactment of a new one.


—If we may judge by the practice of commercial nations, a bankrupt law is almost a necessity for them.


—The great leading ideas of all such laws are two: to divide the property of an insolvent debtor equally among his creditors, and to discharge the insolvent from his debts. The former of these provisions is universally admitted to be both just and expedient, but there is not a very obvious justice in the latter, and it rests upon expediency alone. To take from a creditor a part of a debt which is his property, without full remuneration, can only be defended upon grounds of a public nature, and upon the theory that if an insolvent debtor is to remain under the load of his obligations, his creditors are likely to obtain little or nothing from him, while, if he is freed, the community will have the benefit of his renewed industry and enterprise. To reconcile, as far as may be, these conflicting interests, it is usually provided that a fraudulent debtor shall not receive his discharge, the renewed industry of such a person not being considered valuable; and also. that the creditors should be consulted, and that a considerable part of them should consent to his discharge. In France the law adds, by way of discouragement to bankruptcy and the reckless trading which causes it, and of inducement to a subsequent payment when possible, that a discharged bankrupt, however honest he may have been, and however nearly unanimous may have been the consent of his creditors to his release, shall be under certain civil disabilities, implying a sort of disgrace, until he shall have paid all his old debts, with interest. His creditors have no legal claim against him, but the public authorities institute this moral sanction. Something of this kind is now proposed in England in a modified form, and limited to magistrates and members of parliament becoming bankrupt.


—If it be granted that a careful and judicious bankrupt law is useful in commercial countries, such a law can be provided only by congress. The courts of the several states give precedence to their own citizens who, as creditors, attach or seize the property of an insolvent debtor, over an assignee or trustee for all creditors equally, including their own citizens, who claim under a decree in bankruptcy made in another state, and this whether the seizure is made before or after the date of the decree. So long as this selfish policy prevails, and there is no reason to expect its speedy disappearance, no state law can effect an equal division to creditors of the property of a bankrupt, if any part of it happens to be found out of the limits of that state.


—Again, no state has power, under the constitution of the United States, to discharge a debt due to the citizen of another state or country, unless the creditor chooses to come in and prove his debt in the bankrupt court. For these reasons the states can not pass effectual laws upon the subject of bankruptcies.


—That congress will be urged, and at some time persuaded to pass another bankrupt law, is as certain as that the number of undischarged debtors in the several commercial states will increase with the lapse of time. The pressure of this class, many of whom are worthy and estimable persons, broken by misfortune, induced the passage of the statutes which have been passed. But it will be much wiser in congress to frame such a law carefully and deliberately with a view to permanence, before the pressure becomes extreme. Such action has lately been advocated by large and influential bodies of merchants, and a committee of the senate has been appointed to consider the subject. What should be the provisions of such a law?


—It has been found that the creditors of a bankrupt can not afford to follow up the proceedings in court, or, at any rate, that they will not. They do not wish, as they say, "to throw good money after bad." If they do not, there is great danger that the assets will be wasted in litigation, in fees, and in various ways. In the latest English law a mode of settlement called liquidation can be used by the creditors, and the estate is supposed to be wound up as they may wish; but it is found that the debtor can obtain proxies and votes with great ease, and virtually control his own winding up. This has led to vast abuses, and will, probably, be very much modified. So under our late statutes, as amended in 1874, the creditors could vote for a composition, and here it was found that the debtor could contrive to obtain votes for almost any composition. A bankrupt law, therefore, should be provided with some machinery which will act without being put in motion by the creditors. In a scheme for a statute lately presented to congress, it is proposed that a salaried officer, like a bank, or insurance commissioner, should be appointed in each circuit, whose sole duty it shall be to provide the supervision over the speedy and economical settlement of bankrupt estates, which the creditors can not be relied upon to furnish.


—Another practical difficulty in the working of these laws arises from the selfishness of creditors. In every important bankruptcy, there are some creditors who are determined to attain an advantage over the others, and they will resort to threats and promises and all other means to attain their object. Thus, if the question is of consenting to a composition or to a discharge, these men will insist on being paid for doing what the other creditors are willing to do. In the scheme of a law, above mentioned, a creditor who takes such an advantage is held criminally responsible. This is new; and it is supposed that one or two convictions of creditors, under such a law, would have quite an influence in discouraging this disgraceful practice. The waste and dissipation of assets which was complained of in some quarters, and not without justice, when the act of 1867 was in operation, could best be checked by paying all officers, such as registers in bankruptcy, by salary instead of by fees. The expenses could be reimbursed to the United States by definite payments, as for instance, a fee upon beginning a proceeding and by a specific tax upon the assets.


—In the United States the federal courts are not familiar to the great body of lawyers and of clients. Their jurisdiction is limited, and their ways are not fully understood. It is highly important that their administration in bankruptcy should be rendered familiar and easy, and to this end it is proposed that the registers in bankruptcy should have considerable judicial powers, subject to appeal, and should be required to hold frequent sessions, at convenient times and places, for the accommodation of suitors.


—The vexed question of the discharge of debtors remains to be considered. Most laws, as I have said, provide for a control of this matter by the creditors. It has, however, been found that certain creditors, the most avaricious and the least scrupulous, will take advantage of any power which may be given them over the debtor's discharge by exacting terms from him, either of present payment or of promises for the future. The English statutes, of late years, have declared all such promises to be void, and it is seriously doubted whether it is expedient to give creditors any arbitrary power in the matter. The latest proposition to congress contained the suggestion that every bankrupt who can not be proved to have committed a fraud or wrong upon his creditors, should have a free discharge, but the creditors might vote that the assignee, as their representative, rather than the creditors individually, should undertake the duty of opposing the discharge of a fraudulent debtor.


—It might be wise to impose some disabilities upon discharged debtors until they should pay their debts, as in France; or to refuse a discharge to those who could be proved to have traded recklessly and wantonly after a knowledge of their insolvency; or to fix a minimum of dividend without the payment of which there should be no discharge. So far as we have been able to gather the opinions of persons interested in the question in this country, it is in favor of a liberal policy in the discharge of debtors who have been honest in their dealings.


—The mode of discharge by payment of a composition, accepted by a considerable proportion of creditors, and thereby made binding upon the minority, has been already referred to. It has the great advantages to creditors, of speed and certainty, and to debtors of restoring them, promptly, to the control of their affairs. It is the only mode of discharge practiced in France. It needs, however, to be very carefully guarded, in order that the apathy of some creditors, or the rapacity of others, may not produce great inequality and injustice. It is necessary, therefore, to provide for a thorough examination into the affairs of the bankrupt, in order to see that his offer is large enough, and for a very careful supervision by the court, to see that all creditors are treated alike, and that a composition offered shall be promptly and faithfully carried out. No mere promises of payment should be accepted without full security for their performance.


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