Congress is given the express power to establish "uniform laws on the subject of bankruptcy throughout the United States" (Const. Art. I, § 8, ¶ 4). A bankruptcy law is one by which provision is made for the distribution of the property of an insolvent debtor among his creditors in proportion to their proved claims, and it may include also the discharge of the debtor from further liability to his creditors. The statutes which have been passed by Congress on the subject of bankruptcy have included both these features, and they are distinguishable in this respect from the statutes of the various states which usually provide only for the distribution of property and not for discharge from further liability. It has been determined, however, that the power of Congress to pass bankruptcy laws does not exclude the power of the states to legislate on the same subject, and in the absence of any legislation by Congress, the states may legislate, not only for the distribution of an insolvent debtor's property, but also for his discharge from further liability. But the states are restricted in this respect by limitations which are not applicable to Congress; for a state cannot provide for the discharge of a debtor from liability under a contract made prior to the passage of the state law, as this would be to impair the obligation of the contract (see below, § 265), nor can it discharge the bankrupt from liability to creditors living outside of the state who do not present their claims in the state bankruptcy proceeding, for this would be to adjudge and determine in a state court the rights of persons not subject to the jurisdiction of such court (Ogden v. Saunders, Sturges v. Crowninshield, and Baldwin v. Hale).

When Congress has legislated upon the subject of bankruptcy, any state statute in conflict with the provisions of the federal statute on the subject, or any proceedings of a state court interfering with the proceedings or judgments of a federal court acting in pursuance of the federal statute, will necessarily be invalid j but so far as the administration of the state insolvency laws does not interfere with the operations of the federal bankruptcy law, the state laws will still be valid. Proceedings under the state insolvency statutes are therefore entirely proper until some action under the federal bankruptcy laws has been commenced.