Bankruptcy is a process through which a person who is unable to pay his or her debts is granted relief from the courts by undergoing a supervised step-by-step repayment plan; many debts are partially paid as fairly as possible with the assets that the debtor has.

Many small US cities are struggling with a combination of income problems, such as mismanaged pension plans, a lack of income taxes due to aging populations and declining property tax revenue from the housing bubble. Municipalities find resolution in these problems by decreasing spending on police and fire departments, as well as decreasing pension payouts. Pontiac, Michigan and San Carlos, California have been successful in these attempts. Detroit was unable to overcome the tax revenue problems of years prior and has struggled to find alternate sources of income.

Bankruptcy in the US developed throughout several eras based on governing statute, adoption of the English law, the Bankruptcy Act of 1898, the Bankruptcy Reform Act of 1978 and current themes.

English law is based in the Statute of Merchants of 1285 and applied the doctrine of capias, or seizure of a person’s body for debt, leading to debtor’s prisons and the institutions commonly referred to as “the Poor House” until the middle of the 19th century. The Bankruptcy Act of 1800, repealed in 1803, was the first statute in the United States, brought about by a financial crisis which ruined several prominent founding fathers, including Robert Morris, who created the first colonial banking system. The Bankruptcy Act of 1898 replaced several failed laws during Reconstruction after the Civil War. It lasted for 80 years until it was modernized in the Bankruptcy Reform Act of 1978. The Bankruptcy Act of 1898 established an enduring system of statutes and court procedures that grew with the demands of the Great Depression.

The Bankruptcy Reform Act of 1978 was the first major statute that came about as a proactive modernization of the law, as opposed to an amendment made in the midst of an economic crisis. It is notable for broadly promulgating the policies bankruptcy law operates on presently.