Bankruptcy in the United States was authorized  by the United States Constitution which gave Congress the power “to establish uniform laws on the subject of bankruptcies throughout the United States.”  Congress utilized its power to create the bankruptcy laws under the civil code.  Bankruptcy law’s purpose is defined by statute as giving debtor’s a “fresh start” through liquidation or reorganization.  A bad economy in 1800 was the impetus behind Congress’ first bankruptcy laws.  19th and 20th century bankruptcy law waxed and waned depending on prevailing economic conditions.

In, 1978, the Bankruptcy Reform Act was passed, making it significantly easier for individuals or businesses to reorganize or liquidate.  Bankruptcy law has given United States a competitive advantage compared to other countries by allowing indebted consumers to spend again, stimulating the economy.  Limiting consumer’s opportunities to spend and save would create a drag on the economy during tough times.  During boom times, consumers are already spending and companies are expanding.  Bankruptcy Law is critical because it allows people to cut losses and begin spending again during difficult economic conditions.  Otherwise, economic contractions would be more serious and prolonged.