The topic of discussion for this Constitution Monday comes from Article I.8.4: "The Congress shall have Power … To establish …uniform Laws on the subject of Bankruptcies throughout the United States." This provision in the U.S. Constitution established one system in the nation rather than varied laws in the individual states.
James Madison stated, "The power of establishing uniform laws of bankruptcy is … intimately connected with the regulation of commerce, and will prevent … many frauds where the parties of their property may lie or be removed into different States."
The bankruptcy laws apply to all classes of individuals, corporations, and municipal corporations. The current bankruptcy laws evolved over a period of years. There are three different types of bankruptcy: 1) Chapter VII bankruptcy - the most often used by individuals and corporations - involves all the debtor's assets being taken by the court and sold to pay the creditors. 2) Chapter XI bankruptcy is used by corporations to delay foreclosure long enough to reorganize and make a plan to pay debts. 3) Chapter VIII bankruptcy is filed by those people who want to pay their debts but whose creditors are demanding their pay. The court takes their wages and charges a small fee to make payments until the debts are paid.
After a court takes a debtor's assets under Chapter VII, it declares the debtor to be free of debt and further obligations. Bankruptcy has been limited to only one time during any six year period of time in order to minimize the amount of fraud.
Facts and quotes are from W. Cleon Skousen, The Making of America: The Substance and Meaning of the Constitution, pp. 416-417, where he explains it much better.