The “Honest But Unfortunate Debtor”: An Old And Still-Evolving Concept

Honest and unfortunate (photo by Marilyn Swanson)

By: Donald L Swanson

The phrase, “honest but unfortunate debtor,” has been a part of bankruptcy laws for centuries. A bankruptcy treatise published in 1801, for example, says that bankruptcy laws in England and the U.S. “are meant to protect an honest but unfortunate trader.” [Fn. 1]

No one knows when or how the phrase began. And its meaning has evolved over time, along with changes in economic and social conditions.

What follows is an attempt to:

  1. explore some of those evolutions; and
  2. predict how the “honest but unfortunate debtor” of today might (and should) change, once we get through this pandemic.

Olden Times

In centuries past, an “honest but unfortunate debtor” did not exist, when referring to pre-bankruptcy behavior. That’s because:

  • Only a creditor could file a bankruptcy petition; and
  • The petitioning creditor had to prove the debtor committed an act of bankruptcy.

An act of bankruptcy was defined by statute, in olden times, as fraud or something akin to fraud (think of today’s badges of fraud). Examples from Congress’s Bankruptcy Act of 1800 are (i) departing from the state, (ii) concealing him or herself, (iii) avoiding arrest, (iv) avoiding service of process, (v) concealing goods, and (vi) making “any fraudulent conveyance of his or her lands or chattels.” [Id. at 1-2]

So, by statutory description, a bankrupt person was a pre-petition fraudster and could not be an “honest but unfortunate debtor.”

Yet, the “honest but unfortunate debtor” phrase still existed and found common use in centuries past. Here’s why:

  • Under Congress’s Bankruptcy Act of 1800 and prior laws of England, a bankrupt debtor is required to fully and honestly identify all his or her assets and to surrender all those assets for distribution to creditors; and
  • A bankruptcy debtor who did just that would be described as an “honest but unfortunate debtor.”

Here’s how a U.S. Federal Judge describes, back in 1843, a debtor’s carrot and stick motivations to comply with such disclosure and surrender requirements (under Congress’s Bankruptcy Act of 1800 and earlier laws of England):

  • The stick—debtor’s prison remedies for failure to honestly disclose and fully surrender all assets motivated debtors to comply; and
  • The carrot—the consent-of-creditors requirement for receiving a discharge motivated debtors to “act with economy, industry, and honesty, and make a full surrender of their property.” [Fn. 2]

So, the debtor in bankruptcy who honestly discloses and surrenders all property to creditors, post-petition, is who the phrase “honest but unfortunate debtor” describes, under bankruptcy laws of 1800 and before.

1841 – An Evolution in Congress

Congress’s understanding of the “honest but unfortunate debtor” phrase began evolving, during the time between its first two bankruptcy law enactments: between the Bankruptcy Act of 1800 and the Bankruptcy Act of 1841.

That evolution is explained by the U.S. Supreme Court like this:

  • “The act of 1800, like the English law, was conceived in the view that the bankrupt was dishonest”; but
  • “The act of 1841 and the later acts proceeded upon the assumption that he might be honest but unfortunate.” [Fn. 3]

1873 – An Evolution in the Supreme Court

Fast forward to 1873, and the “honest debtor” concept is evolving. The U.S. Supreme Court begins narrowing the idea of what can qualify as an act of bankruptcy, by focusing on a debtor’s pre-petition honesty.

Here’s how the U.S. Supreme Court explains, in 1873, why an “honest” debtor does not commit an act of bankruptcy—even when such an act technically exists under statutory language:

  • Insolvent parties must be allowed to take the chance that “their energy, care, and prudence in business may enable them finally to recover without disastrous failure or positive bankruptcy”;
  • Many debtors may find themselves “technically insolvent” but still able “to save their commercial character and much of their property” by “forbearance of creditors, by meeting only such debts as are pressed, and even by the submission of some of their property to be seized on execution”; but
  • “Their honest struggle to meet their debts and to avoid the breaking up of all their business is not, of itself, to be construed into an act of bankruptcy.” [Fn. 4]

1971 – Congress and Supreme Court embrace the “honest debtor”

By 1971, under the Bankruptcy Act of 1898 as subsequently amended, the U.S. Supreme Court discusses the “honest debtor” like this:

  • “One of the purposes of the Bankruptcy Act is to “relieve the honest debtor from the weight of oppressive indebtedness and permit him to start afresh”; and
  • “A bankrupt by his discharge” receives “a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.” [Fn. 5]

Under today’s Bankruptcy Code—Pre-pandemic

The meaning of “honest but unfortunate debtor” under today’s Bankruptcy Code is well known and understood. It refers to a bankruptcy debtor whose pre-petition and post-petition behaviors are characterized by good faith and honest actions and by use of the bankruptcy laws in an appropriate manner and with full disclosures.

Such a person is entitled to a discharge and a fresh start. Discharge denial and other remedies are available when a debtor acts improperly, either pre-petition or post-petition. But a debtor is presumed honest and deserving of a discharge, unless and until evidence demonstrates otherwise.

With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), however, Congress took a step backward by presuming, irrefutably, that all middle class debtors are dishonest and intent on abusing the Chapter 7 process.  So, Congress required, by BAPCPA, that middle class debtors file Chapter 11 or Chapter 13 cases instead—without exception.

Unfortunately, many provisions of BAPCPA are intended as nothing more than punishments for middle class debtors—and have had abusive results for many honest but unfortunate debtors in the middle class.

Looking ahead—Post-pandemic

The pandemic in which we now live is transformative.

Many of our assumptions, from a few weeks ago, are no longer valid. New experiences necessitated by the distancing are revealing better ways of doing life and business. For example:

  • Working from home is not only possible, it can be better for many;
  • Video communications can’t replace direct contact—but can come close;
  • A walk in the park is invigorating;
  • That daily commute is not missed;
  • Getting more sleep is healthy;
  • That old and long-forgotten hobby is fun again;
  • Etc., etc., etc.

Likewise, we are going to find that many of our bankruptcy assumptions are outdated. Here are examples of new assumptions, regarding middle class debtors, that are likely to (and should) arise:

  • Middle class debtors can have financial troubles through no fault of their own—such troubles might result from a pandemic or from a myriad of other sources;
  • Middle class debtors should be presumed honest in bankruptcy until evidence shows otherwise—not the other way around;
  • Middle class debtors should be entitled to Chapter 7 relief—not presumed to be abusing the Chapter 7 system; and
  • Middle class debtors should not be punished in bankruptcy (by consigning them to Chapters 11 or 13) when they are “honest but unfortunate.”


One possible development from this pandemic is a reassessment of how we treat middle class debtors in bankruptcy.

Perhaps members of Congress will start viewing their middle class constituents as, (i) presumptively honest, and (ii) subject to financial reverses and difficulties for a variety of “honest but unfortunate” reasons.

Hopefully, it will then be time for Congress to revisit the worst abuses of BAPCPA and toss those abuses out the window!

Footnote 1.The Bankrupt Law of America: Compared with the Bankruptcy Law of England,” by Thomas Cooper, at 361 (1801).
Footnote 2. In re Klein, 42 U.S. 265, 278 (1843). Note: In re Klein is the second of two Supreme Court opinions reported at 42 U.S. 265, under the name Nelson v. Carland.
Footnote 3. Continental Illinois National Bank v. Chicago, Rock Island & Pacific Ry. Co., 294 U.S. 648, 670 (1935).
Footnote 4. Wilson v. City Bank of St. Paul, 84 U.S. 473, 486 (1873).
Footnote 5. Perez v. Campbell, 402 U.S. 637, 660 (1971).

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