Debt Elimination Success Seminar
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Section 1
A Look at Debt
History of Debt
Credit Card History
Current State of Debt
How You Got Into Debt
Good Debt Bad Debt
Business vs. Personal Debt
Section 2 Dealing With Your Money
The Two Step Plan
Doing The Two-Step
Step One
Step Two
The Paths Out of Debt
1- Create a Debt Payment Plan
2- Neogtiate Better Rates & Terms
a.Consolidation Loans
b.Consumer Credit Counseling Services
3- Negotiate Lump-Sum Settlements
4- Bankruptcy
5- The Easy Way
6- Win $1,000,000
Living Debt-Free
Manage Your Money
Make More Money
Save Money
SameMoney-MoreFun
Stay Debt-Free
You as a Business
Section 3 Dealing With Your Creditors
Alerts/Scams
The Credit Industry
Credit Industry
The Fine Print
The Secondary Debt Market
The Debt Collection Process
Original Creditor
The Charge-Off
Collection Agency
Legal Problems
Dirty Creditor Tricks
Dealing with Debt Collectors
Dealing with Debt Collectors
Statute of Limitations
Cease and Desist Letter
Section 4
The Credit Report
The Credit Report
Credit Score
Credit Repair
Section 5
Dealing With Yourself
The Critical Factor
The Art of Prosperity
The End of Failure
Prosperity Coaching
Section 6
Kids and Money
Kids and Money
How to Pay for College
Section 7
Debt Information
Bookstore
Debt Facts
Radio Show
Resources
About Us
Privacy Policy
Site Map
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| 1800-1849 | 1850-1899 | 1900-1949 | 1950-1999 | 2000+ | Full PDF Version |
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Before the Revolution - Our English Heritage
The American system of debt and debt collection was modeled after, to no one’s surprise, the British legal system. This led to some colorful laws. The first bankruptcy law occurred in English law in 1543 and allowed the imprisonment of debtors. Later statutes in 1571, 1604, and 1623 allowed for punishment of those who aided bankrupts. All bankrupts were presumed dishonest and fraudulent and could be forced to repay or be hung. However imprisonment was far more common and occurred in England for over three hundred years. Although severe by modern standards imprisonment for debt was not a British invention as the Greeks and Romans had condemned debtors to slavery.
In the seventeenth century when the commercial market in England was expanding the concept of bankrupts as honest but unfortunate started to circulate. This gave birth to the thought that creditors could oppress debtors as well as debtors oppress creditors. In 1706 a new bankruptcy statute recognized differences by offering absolution to honest bankrupts while retaining criminal punishment for dishonest ones. Eventually the public view of debtors began to change. This was in large part due to the 1760 Depression that happened after the end of the Seven Years War. Then even prominent merchants failed and it became harder to stigmatize insolvency as moral failure.
Debt in Colonial America
Debtors abounded in the Colonial era but failing in business was not as socially reprehensible as was falling from grace. While laws concerning debtors and debt collection revolved around moral obligations as well as financial responsibility there was a much more defined line between financial failure and personal character than we have today. That said the penalties for debt were by today’s standards quite harsh.
In the Colonies a 1639 Maryland statute required insolvent debtors to assign their property to their creditors in proportion to their debts. Debtors had to work off unpaid balances as indentured servants, bound successively to each creditor in declining order of the amount of their debt until every debt had been paid in full.
The other option for a debtor was insolvency. Insolvency was a way to be released from prison or a way to avoid arrest but it was not without a high price. Debtors emerged from insolvency proceedings stripped of their substance but not their debts.
Early records show imprisonment for debt happening in Salem Massachusetts in 1678. In the 1760s a debtor was imprisoned for failing to pay an arbitration award. Debtors prison continued to operate in America until almost 1850.
Bankruptcy laws in Colonial America contained harsh punishments in hopes of providing an incentive for bankrupts to avoid court proceedings. The Pennsylvania Bankruptcy Act of 1785 allowed convicted bankrupts to flogged and have an ear nailed to a pillory. In order to make the punishment permanent the ear was then cut off. In early colonial New York, bankrupts were branded on the thumb with a "T" for "thief."
Financing Freedom
American public debt pre-dated the Revolution with every colony using it to finance public obligations. But the war itself led to the first large-scale public debt with the issuance of direct loans and script. By the end of the war Congress had issued some $200,000,000 in Continental currency, sold about $60-70,000,000 in loan certificates to investors and borrowed perhaps $12,000.000 from European sources.
Born in Guinea in 1791 and sold into slavery, Prince Jenks fought in the Revolutionary War. Captured and later released Jenks helped America win its independence but in doing so lost one of his legs. Peg-legged and indebted he took to sea until his army pension kicked in on March 4, 1789 the day the U.S. Constitution took effect. Homeless and unable to vote Jenks did enjoy one benefit of freedom, the ability to enter into contracts and therefore the ability to get into debt. This led him to the position of needing to pay off a creditor and he did so by granting permission to garnish his pension.
The Morality of Debt
The concept of debt as a moral issue has played a central part in the formation of laws, public opinion, and personal conduct throughout American history. It still does. From the sixteenth century English judge who believed that if the debtor couldn’t provide food for himself he should be allowed to starve to death, to the bankruptcy bill of 2005, there has been a strong argument that the creditor’s rights are paramount.
In 1716 Cotton Mather, the minister of Boston's Old North church, invoked the debtor’s plea “Have patience with me and I will pay thee all.” But Mather recognized the occasional necessity of debt saying “People must not be in debt unto another, any further than what is unavoidable.” He also recognized that debt was an integral part of business expansion.
In the mid-nineteenth century as more and more people met with financial failures that had nothing to do with bad character, judgment, or money management the public perception of debt began to change. It was then that laws recognizing that both the creditor and the debtor hoped to profit from the exchange were created. As such there was a shared responsibility when the debt couldn’t be repaid. This new concept was the foundation for standardization of debt collection laws that led to the end of debtors prison in 1849.
Financial Panics, Crashes, Recessions, & Depressions (The Business Cycle?)
Throughout American history there have been times when turmoil and panics brought financial devastation to the country. Interestingly enough they seem to occur on a regular basis at least once every generation. The exception to this was the periods immediately after World War II.
I’ve heard these occurrences described as the business cycle as though they were a naturally occurring event. But from what I’ve discovered they occurred because of human actions, most often investment speculation funded with credit. The sad thing is that I see this happening again today so be aware of the state of business when making personal financial decisions. Here are some of the past financial panics.
The major upheavals started in 1792, with another wave of failures in 1797. They continued in the next century with panics in 1819, 1837, 1857, the Great Depression (the first one) of 1873-1878, the farm mortgage crisis of the 1880s, financial downturn in 1884, and another panic in 1893. The pattern continued with a panic in 1907, T he Dpression of 1921, The Great Depression (the second one) of 1929-1942, recessions in 1943, 1957, 1960 & 1969, the inflationary period in the late 1970s, the savings and loan crisis of the 1980s, the Wall Street crash of 1987. We escorted in the current century with the 2001 recession.
The Panic of 1792
The Panic of 1792 was triggered by the collapse of William Duer’s speculative empire. Duer was a delegate to the Continental Congress was one of the largest contractors supplying the Continental army. Investing in paper assets, stocks, government warrants, state securities, and currencies and securities on the consolidated national debt, he hoped to take over the Bank of New York and perhaps the Bank of the United States. But when stock prices fell his high interest loans and leveraged purchases defaulted. Duer died in debtors prison in 1799.
1776-1799
Suspicion about the motives of creditors has been around as long as the country.
Thomas Jefferson believed that British tobacco merchants conspired to enslave Virginia tobacco farmers into generations of servitude by getting then to buy supplies on credit and when their debt was sufficient lowering the price of tobacco to snare them in the trap.
Commerce between the Colonies and England was extensive before the war so naturally debt was too. The peace treaty that ended the Revolutionary War had a provision to allow British creditors to pursue their pre-war debts in American courts without hindrance and with no suspension of interest for the years of hostility.
Because the law gave creditors the right to have absolute power over their debtor’s life and liberty many debtors scoffed at the idea of independence. Creditors could at their discretion have debtors arrested and their property seized. One debtor’s will included instructions to sell his body’s remains to surgeons. He wanted the proceeds of the sale to be lent with interest in order that it could generate ongoing money to pay his debts. There was one problem however, his creditors owned and controlled his body.
After the Revolution English merchants flooded the American market with their higher quality, lower priced goods. Exports fell, imports grew, income and wealth declined. This brought on a postwar depression that flooded the courts with debt collection lawsuits and crammed the jails full of imprisoned debtors.
But American merchants had their share of tricks too. Post-war merchants used advertising to create demand and used a stair-step approach to profits. By first advertising goods at enticingly low prices for cash and then in exchange for various commodities and finally, on credit at seemingly affordable terms they blurred the distinction between luxuries and necessities.
In the 1780s & 90s debt was a great incentive to migrate west. So many debtors fled the east to live in less-expensive Kentucky that the mere absence of a debtor raised the speculation that he had “gone to Kentucky.”
It was in the 1790s that criminal codes were updated eliminating whipping, ear-cropping, and branding. They also instituted prison sentences of specified lengths. This left only debtors to serve an indefinite prison term.
This led to an interesting situation. If you robbed a bank of $1,000 and were caught you would be sent to prison for a specific amount of time where you’d be fed, clothed, and kept warm. But if you borrowed $1,000 from a bank and couldn’t repay your loan you could be imprisoned for an indefinite period, and if you couldn’t pay for your own food, clothing or heat you would be left to die.
Bankruptcy Easier Said than Done
The right to bankruptcy protection is so fundamental that is was written into the U.S. Constitution. Article 1 Section 8 states, “To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States.” Even though this article is unambiguous the first permanent national bankruptcy law didn’t go into effect until 1898.
Debtors protested the lack of bankruptcy protection as far back as 1798 using July 4th as a day to highlight their lost independence. Their protests led to a short-lived bankruptcy bill but the moral argument against debt relief prevailed for another 100 years despite the Constitution.
Early Forms of Debt
In eighteenth century America the most common from of debt was the book account. Generally a book account was a listing of goods purchased and payments received from a particular customer. Although there was no interest charged and no specific promise to pay the implied promise to pay made them easily enforceable. But even then debtors had the right to present evidence that challenged the accuracy of the account. And although the creditor could sue to collect they were subject to the statute of limitations that hadn’t yet been applied to written debts.
Bills obligatory and promissory notes were also common forms of debt. They both set the terms of payment with bills obligatory generally used when merchandise was purchased and promissory notes used for simple cash loans. Bills of exchange were precursors to modern checks. Like today’s checks they instructed a second party, a bank or other entity, to pay a third party. Also like today’s checks non-payment carried penalties in addition to the face value. They included interest charges and collection costs.
Written debt instruments had provisions that books accounts and oral debts didn’t. They incurred interest whether by agreement in the contract or by statute. Statute established maximum interest rates above which lay the forbidden realm of usury. But the most valuable part of the written debt was its transferability. As such the written debt could be used to conduct commerce as if it was cash or the debt could be bought and sold as a commodity.
Early Globalization
In the 1790s Benjamin Franklin Bache published a newspaper called the Aurora. In it he wrote that the merchants of the day were “men who know no country but that where they can make money,” who “carry their capitals ships and our sailors to the country which will encourage them.”
Bache also attacked the “clan of Land Jobbers” the have “monopolized” the public lands because “our people are loaded with debts for the purchase of land which will plunge multitudes in distress and ruin.”
Early Debt Collection
William Samuel Johnson was a delegate to the Constitutional Convention and president of Columbia College. But before the Revolution he was a creditor’s lawyer, one of America’s first debt collectors. Because the process of legal debt collection could take years Johnson often recommended to his clients that they accept a negotiated settlement rather than engage in lengthy litigation. But this didn’t stop him from employing a tactic that is still effective today, the threat of a lawsuit. The threat of a suit worked for two reasons one being fear and the other ignorance. Like today most debtors didn’t know the law gave them considerable legal rights. This fact gave Johnson one of his most powerful weapons, the bluff.
If the debtor was knowledgeable of the legal procedures and wasn’t scared by the word lawsuit then convincing the creditor to negotiate was Johnson’s best tactic. However it wasn’t always successful so lawsuits often occurred.
There is one major difference between the legal process then and now. Then the common way to begin was by a writ of attachment. The attachment required a debtor to provide security sufficient to satisfy the debt. If the debtor had property it could be used but if not his body became the security. If the debtor’s body was attached he needed to secure the services of a bondsman or sympathetic friend or relative. The alternative was imprisonment. Not designed as punishment but as a way to guarantee a court appearance the imprisonment never-the-less imposed punitive sanctions, jail.
Even then debtors with steady nerves and a good grasp of the law often responded to the threat of jail with indifference or defiance. For being imprisoned may have helped them delay a payment they were required and able to make or been a way to avoid a negative credit report. Of course there were two good ways to avoid the writ of attachment one being stay in your home where you were exempt from being served, which some did for years, or flee and hide.
As today, even a victory in court didn’t produce immediate payment. Instead a writ of execution was implemented. In simple terms it directed the sheriff to attach the debtor’s property. But the debtor could avoid the attachment of property the same way they could avoid the initial attachment, by fleeing or hiding. Even when property was attached there were loopholes and complications. Only non-exempt property could be attached which allowed debtors to keep basic necessities and in Southern state plantation land was off limits. Even today Florida and Texas retain this exemption.
Even when land could be attached problems often ensued. Often mortgages or other liens were given precedent and even when the property could be seized and sold the lack of buyers and cash often netted the creditor only a fraction of the stated value. And the attachment of last resort, imprisonment, may have given the creditor a sense of justice but it provided him with no money. These complications being known provided incentive for the creditor to negotiate rather than sue. And in the absence of a settlement lawyers often advised creditors to consider the debt lost rather than incur the time and expense of suing.
As early as 1788 Samuel Barrett, a Boston justice of the peace, used printed forms to notify debtors that he would sue them unless they paid. It had blanks left for the names of the creditors and debtor, their places of residence, the form and amount of the debt and the length of the remaining grace period before the filled suit. By 1799 newspapers were running ads for debt collection services.
Who was in Debt?
Thomas Jefferson had a life long habit of purchasing fine wine and foreign luxuries on credit. With the failure of a friend whose note he had endorsed Jefferson was brought to virtual bankruptcy. He wound up more than $107,000 in debt. When he died in 1826, his large estate and all his possessions, including 130 slaves, were auctioned off to pay his creditors.
Alexander Macomb, one of New York's richest and most prominent citizens, wound up on debtors prison because of his partnership with William Duer.
Robert Morris signer of the Declaration of Independence and the U.S. Constitution was considered the financier of the America Revolution. He profited so hugely from government contracts, many of them obtained while he himself was serving as Superintendent of Finances that he emerged as the richest man in America. He bought large tracts of land on credit hoping to resell them quickly to other speculators. He used bills of exchange drawn on British accounts as a source of credit but when war broke out in Europe his notes were not honored. This led him to debtors prison where he remained until released because of the short-lived bankruptcy law of 1800.
James Wilson, Associate Justice of the United States Supreme Court, was briefly jailed in debtors prison in 1796.
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