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Insolvency Law

Expert guidance on all aspects of corporate and personal insolvency

12 AUG 2009

Historical Thoughts On Why Discharge Is Non-Waivable

I was recently reading some articles from the 1980s and 1990s debating why discharge is non-waivable. Thomas Jackson in particular, in his article Fresh Start Policy in Bankruptcy Law, 98 Harv. L. Rev. 1393, made some interesting behavioral law & economics arguments explaining non-waivability. But I am a historian of bankruptcy, not a scholar or practitioner of its modern manifestation, so I have a rather different understanding of the roots of non-waivability.

I've just completed some research that involved, among other things, inquiring into the legislative history of the bankruptcy Act of 4 & 5 Anne, passed in 1706. This was the first English bankruptcy law to include discharge. From what I saw in the legislative documents and the pamphlet literature, no one even thought to ask whether discharge should be waivable. So the simple reason discharge is non-waivable is because no one thought about whether it should be, and over time its non-waivability became a normal, assumed part of bankruptcy law.

Of course, that begs the question why no one considered this option, and I would argue there are several goods reasons for it. Most important, bankruptcy was a) a creditor's remedy and discharge was seen as giving debtors an incentive to disclose assets as a means of aiding creditor recovery, and not, as we might think of it today, as a means of aiding the debtor. And b) bankruptcy was involuntary--the creditors put the debtor into bankruptcy. Under these circumstances, the idea that a debtor could waive discharge at the time of assuming the debt makes no sense. How could a debtor intelligently agree to waive discharge if he had no control over being placed into bankruptcy? And why would creditors give a debtor the power to agree to waive discharge if discharge was perceived as being ultimately a benefit for creditors?

But there is more. Discharge was waivable, after a manner of speaking, because bankruptcy was waivable (though not ex ante), again after a manner of speaking. What I mean is that historians of bankruptcy seem to have overlooked the extent to which bankruptcy, from the start an unpopular procedure, was a second order solution and composition was the default position. In a composition, the debtor might effectively waive the chance to get a contractual discharge in exchange for, say, a longer repayment period.

And finally, the whole discharge provision was for upward of 40 or 50 % of bankrupts a sham anyway. Under 5 Anne, passed in 1707, the bankrupt had to have a certificate of discharge signed by 4/5s of the creditors in number and value. Later statistics offered to Parliament suggest that as late as 1805 only about 60% of bankrupts obtained discharges. Instead, creditors used their leverage over signing the certificate as a way to comment on what they thought of the bankrupt and in part to wreak vengeance. It would have been incredibly unfair in a situation such as this, where the creditors had so much power, to have given debtors the option to waive discharge but then to continue to subject the debtor who had not agreed to waive discharge, and who thus presumably would have obtained his loan on less favorable terms, to have to suffer from retributive creditors refusing to sign the certificate.

The upshot of these musings is that it seems to me that modern scholars ought not to ask why discharge is non-waivable. It's non-waivable for several perfectly good historical reasons. The better question is whether, considering that the reasons for its original non-waivability have now disappeared, we think discharge should continue to be non-waivable.

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