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If, as you say, all parties want it, then, were it not the law, it could simply be written into the contract. Contracts often have exit clauses or explicitly defined penalties for noncompliance. Loans generally don't because they're written in the context of a legal environment that guarantees exit via bankruptcy; it's implicit.
I'm not sure all parties do actually want bankruptcy protections, but either way I don't see how it threatens the theoretical basis for preserving the sanctity of contract.
I'm not sure what the clause "were it not the law" means. In any case, it's not implicit, but explicit, that a bankruptcy court has broad authority to modify or set aside any contract or part of a contract necessarily to achieve the objectives of bankruptcy law.
I also don't think it threatens the theoretical basis of sanctity of contract! This is a small thorn in that basis that is readily explainable and proves nothing about the general case. Again, this isn't the internet gotcha-game.
Ah, I can see how that's unclear. Here's what I meant:
Suppose that the bankruptcy process were repealed. Debtors can still run out of money, obviously, but there's no established legal process to discharge insolvent debts. Further, suppose that both creditors and debtors are unhappy with this change, as your prior comment did. My point was that in this scenario, there's no reason they couldn't just add a bankruptcy clause to their loan contracts. The actual process is identical, it's just that instead of it being codified by law, it's codified by contract, which the courts enforce just as they would have a standard bankruptcy.
(In practice this is somewhat complicated, as bankruptcy proceedings generally involve more than two parties, not all of whom necessarily have agreements with each other. This isn't an insurmountable issue if everyone really does like the process as it stands; every creditor could agree to abide by the decisions of a bankruptcy court.)
When I said it's implicit, what I meant was that contracts are currently written with the understanding that bankruptcy is possible. That is, it's implicit in the lending contract. There's no need to write such a provision because the courts will enforce it regardless. It's not that both parties want their contract overridden by the state. It's that, given they know the state will override their contract in this way, there's no need to make it explicit in the text. If all parties really do want the possibility of bankruptcy to exist, where the process is defined is just bookkeeping.
This isn't intended as a gotcha; in principle it should be very surprising to find a case where the practice of consensual contracts excludes a Pareto improvement, so it's important to determine whether this is such a case. I don't think it is, but it was worth exploring.
As an aside, I'm not a particularly committed libertarian either. Even were the theory air-tight for rational, aligned agents (which it may or may not be), ignorance, foolishness, and principal-agent problems often lead to entities making bad contracts and I think we're better off for the ability to nullify them under some circumstances, even given the costs associated with people anticipating that possibility.
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