On Bankruptcy in a Free Society

[From my Webnote series]

[This post needs to be organized, it’s here in raw form for now]

As I said in another post, “I ran this idea by Hans Hoppe last night by Hans Hoppe, with whom I was having dinner in Istanbul, and he immediately saw it the same way. I don’t mind operating without a net, but it’s nice to have one.”

Grok’s summary (not yet reviewed for accuracy):In his May 9, 2025, blog post titled “On Bankruptcy in a Free Society,” Stephan Kinsella outlines a tentative theory of bankruptcy within a libertarian framework, emphasizing principles of justice, property rights, and contractual obligations in the absence of state intervention. Kinsella begins by critiquing the existing state-managed bankruptcy system, which he views as flawed due to its reliance on fiat currency, fractional-reserve banking, and government-backed financial distortions like deposit insurance and bailouts. He argues that in a free society—characterized by sound money (likely gold-based), full-reserve banking, and no central bank—bankruptcy would function differently, aligning more closely with natural justice and market-driven outcomes. The core issue of bankruptcy, he posits, arises when a debtor cannot fulfill contractual obligations to multiple creditors, necessitating a fair method to allocate limited resources.

Kinsella suggests that in a libertarian society, bankruptcy would be resolved through private, contractual mechanisms rather than state-imposed rules. He envisions creditors and debtors negotiating agreements in advance, possibly through standardized contracts, to determine how assets would be distributed in case of insolvency. These agreements could include clauses prioritizing certain creditors (e.g., secured creditors with collateral) or establishing proportional distribution for unsecured creditors based on the debt owed. Kinsella draws on historical practices, such as medieval merchant customs, where creditors collectively seized and sold a debtor’s assets to recover funds, suggesting that similar decentralized, market-based solutions could emerge in a free society. He emphasizes that without state privileges like limited liability or forced debt discharge, debtors would face stronger incentives to avoid insolvency, and creditors would be more diligent in assessing risks.

A key aspect of Kinsella’s theory is the rejection of state-enforced bankruptcy protections, such as automatic debt forgiveness or limited liability, which he sees as distorting natural incentives and enabling reckless borrowing. In a free society, he argues, debtors would remain personally liable for their debts unless creditors voluntarily agree to forgive or restructure them. This could lead to outcomes like debt bondage or voluntary servitude in extreme cases, though Kinsella notes that market competition and reputational incentives would likely discourage such harsh arrangements. He also addresses the role of collateral, suggesting that secured creditors would naturally have priority over unsecured ones, as their loans are tied to specific assets, aligning with property rights principles. Fraudulent behavior by debtors, such as hiding assets, would be treated as theft, subject to restitution or punishment under libertarian legal norms.

Finally, Kinsella acknowledges the complexity of insolvency in a free society, particularly when multiple creditors claim the same assets. He proposes that a libertarian bankruptcy system would rely on arbitration or private dispute resolution to settle conflicts, guided by pre-existing contracts and customary practices. While he does not provide a definitive blueprint, Kinsella’s theory hinges on the idea that a free market, unencumbered by state distortions, would naturally evolve equitable and efficient mechanisms for handling bankruptcy. These mechanisms would respect property rights, enforce contractual obligations, and minimize the moral hazards present in current systems, fostering a financial environment where both debtors and creditors act with greater responsibility.

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Previous thoughts on Bankruptcy:

KOL457 | Sheldon Richman & IP; Andre from Brazil re Contract Theory, Student Loan Interest Payments, Bankruptcy, Vagueness, Usury:

On bankruptcy, Kinsella notes his evolving view, influenced by inalienability concepts, suggesting that extreme debt obligations resembling slavery might justify limited bankruptcy protections in a free society, as discussed in his recent blog post

KOL004 | Interview with Walter Block on Voluntary Slavery and Inalienability: >>

STEPHAN KINSELLA: But I don’t think I can agree now to sell my foot and have it be enforced.  That’s why I said who can be compelled to go through with it?  If I choose not to go through with the surgery – now, I’ll give you this.  I think that there’s some circularities in parts of your argument, but I’ll give you this.  The difficulty with my argument is this, which you haven’t raised, so I’m going to give you…

00:39:32

WALTER BLOCK: I need all the help I can get.  Thank you.

00:39:35

STEPHAN KINSELLA: The hard part is this.  I believe you can alienate title to acquired objects or even future acquired objects.  So let’s suppose I agree that every piece of property that I ever come to own in the future is yours, and you’re my master.

00:39:57

WALTER BLOCK: Right.  Now you’re the slave; I’m the master.

00:40:00

STEPHAN KINSELLA: So you can’t beat me for running away, but you can snatch every morsel of food away from me the second I get it.

00:40:07

WALTER BLOCK: Interesting.

00:40:08

STEPHAN KINSELLA: Every dime I make from any job you can take it from me.  You can garnish my wages.  You can garnish my food.

00:40:13

WALTER BLOCK: Interesting.

00:40:14

STEPHAN KINSELLA: So basically that would give you the ability to compel me to do what you want because if I don’t listen to your orders you can cause me to…

00:40:23

WALTER BLOCK: Die.

00:40:24

STEPHAN KINSELLA: Suffocate to death or die, whatever.  So – and I don’t have a good argument against that except for some kind of libertarian bankruptcy-type argument, which is the ability to kind of have a little sphere of minimal living support that you can’t alienate.  But that makes me uncomfortable because it’s like a bankruptcy argument.

00:40:45

WALTER BLOCK: No.  Welfare for the bankrupt.

00:40:48

STEPHAN KINSELLA: So if you could compel someone to do what you want by having them alienate everything outside of their bodies, then you could achieve almost the same thing as with your body.

KOL130 | Bad Quaker: Kinsella and Tucker on Abortion, …:

(Incidentally previously I toyed with the idea that there might be some sort of natural “bankruptcy” type right, because if you can alienate all your future property, it’s tantamount to slavery since the person you sell everything to could deprive you of food and kill you. The formulation above sort of supports this: becaues any human actor has to employ some means. so he has no right to any particular resources but he has to have some rights to some resources, which might place limits on a person’s ability to alienate all of his future owned resources–which is sort of what the bankruptcy law gets at. But I am not sure about this.)

KOL146 | Interview of Williamson Evers on the Title-Transfer Theory of Contract:

STEPHAN KINSELLA: Well, the way I’ve interpreted your theory and Rothbard’s in my Misesian/Rothbardian/Hoppian way is that it’s all about transfer of title.  And theoretically you could engage in a future title transfer, which – say, to a debtor, which basically transfers every piece of property that you ever acquire forever, even a piece of food going into your mouth.  And if you did that, it would be equivalent or tantamount to a type of slavery.  And so maybe some argument like that could be used to justify some type of bankruptcy type of provision, which I think is getting at the same insight that you’re talking about here.

00:25:39

WILLIAMSON EVERS: But I don’t – so I am uncomfortable with this idea that you could convey everything including every morsel of food and drink of water.

00:25:51

STEPHAN KINSELLA: Correct.

00:25:52

WILLIAMSON EVERS: For the future.  But anyway, that point that we’re both getting at is that this is an area that deserves further exploration, and so I am uncomfortable with the whole idea of bankruptcy.  And this is why maybe Marcus Cole has something to contribute or other future people that maybe aren’t born yet.  Who knows?

00:26:15

So generally the idea of bankruptcy is you say I can’t pay, and I want to start over.  And the law makes various provisions, and it might make a homestead exemption and whatever, whatever.  I am not really comfortable with that.  I think you still owe the money, and you can’t just get out of it, and I’m really troubled.  There are people, even people that might claim they’re libertarians, who want to – I sound like I’m getting into a big heresy hunt here.  But during the last financial crisis with all the homes going into foreclosure and things like that, there were people going around advocating that people who were having trouble paying their mortgages just walk away.  Walk away.  You’ll be better off.

00:27:22

STEPHAN KINSELLA: That’s the title of Doug French’s book I think, right?

00:27:24

WILLIAMSON EVERS: You’re so-called…

00:27:25

STEPHAN KINSELLA: I think that’s the title of his book, Walk Away.

00:27:29

WILLIAMSON EVERS: Yeah.  Anyway, the point is they were telling people even though you’ve made this contract, you’ve made this money, now you’re under water, as the phrase goes.  Just walk away.  And the system has already built into it an expectation that a certain number of people will walk away, so do it.  I don’t agree with that.  I think that’s wrong…

00:27:55

STEPHAN KINSELLA: Let me…

00:27:56

WILLIAMSON EVERS: Anyway, so that’s an area that I think needs – and again, I’m not writing in this area, but I – it troubles me and seems to be against libertarian values.  But I’m open to argument as I am with everything.

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I also touch on this in KOL463 | Contracts, Usury, Fractional-Reserve Banking with André Simoni:

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Conza has some thoughts here.

I believe I touched on this topic lightly in a few pieces, wondering whether taking a debtor’s property from him to satisfy a debt would be enforceable/justifiable if that meant the debtor’s actual death (for example if a person contractually assigns to someone else all his future property, even food that is given him). I can’t find now where I touched on this—I believe I mused that perhaps the arguments for inalienability in the body might cover transfers of property that would result in death or harm to the body; as I mention in my  A Libertarian Theory of Punishment and Rights:

For example, imagine that A, a thief, admits that there are rights to self-ownership but that there is no right to property. If this is true, we can easily punish him simply by depriving him of external property, namely food, air, or space in which to exist or move. Clearly, the denial of his property through the use of force can physically harm his body just as direct invasion of the borders of his body can. The physical, bodily damage can be done fairly directly, for example, by snatching every piece of food out of his hands until he dies—why not, if there are no property rights? Or it can be done somewhat more indirectly by infringing upon his ability to control and use the external world, which is essential to his survival. Such property deprivation could continue until his body is severely damaged—implying, since this is tantamount to physical retaliation in its effect on him, that physical retaliation in response to a property crime is permissible—or until he objected to such treatment, thereby granting the existence of property rights. Just as one can commit an act of aggression against another with one’s body—for example, one’s fist—or with external property—a club, gun, bomb, poison—so one’s self- ownership rights can be aggressed against in a limitless variety of ways by affecting one’s property and external environment.

But I believe somewhere in my writing I suggested that one could argue that taking all the food from someone would be tantamount to killing them, thus justifying some type of bankruptcy right, in inalienability grounds, but I cannot find it.

I do find in my notes a letter I wrote after law school to my former bankruptcy law professor, James Bowers (R.I.P.). Here is the text, for what it’s worth. Note that this is from 1993, before I had started to write in more detail on contract theory, inalienability, and so on, and anticipates many arguments I would later make (2003) in  A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability.

Stephan Kinsella, Letter to Professor James Bowers, August 9, 1993

My own views on bankruptcy laws are as follows. The typical libertarian view on this (as far as there is one—I haven’t actually seen much writing on it other than by Murray Rothbard in his masterful The Ethics of Liberty, ch. 19) is that, if A loans money to B, and B promises to repay $X to A on a certain date in the future, then if B does not or cannot repay A on that date (e.g. because he is bankrupt), then it is effectively the theft of A’s money. So then A would sue B for the money, and recoup it in various forms, unless B is totally bankrupt and has no assets, so then A would have to garnish B’s employers etc. But B would never be absolved from a debt just because he was unable to pay it. Of course, knowing ahead of time that sometimes debtors are simply unable, through no fault of their own, to repay debts when due-date comes, A and B might put a clause in their contract stating for a certain private type of absolution of the debt, or renegotiation, or whatever. Or maybe they will use mortgages/security devices, etc., as you are of course aware.

Now I agree with this, but not 100%. My concept of rights is explained in my Estoppel article. But the point is that A does not have the right to use force against B unless force has first been used by B. Therefore, by this theory, there is no such thing as a “contract,” typically understood, that can legitimately be enforced. This is because a mere promise is a mere expression of words by B; and this is not the use of force against A; therefore this cannot justify A’s use of force against B. B does not initiate violence against A by merely saying something to A, such as, “A, I promise to pay you $1000 in a year in exchange for $900 now.” And arguments about A’s reliance are flawed, I believe, because why should A “rely” on these words, unless he knew promises were already enforceable? So reliance can’t justify enforceability, because there would be no justified reliance if it weren’t enforceable. That would be a circular bootstrap argument.

I believe there are only property rights—the right to control your own body and to not have its physical integrity breached; and the right to own property that is either homesteaded or voluntarily acquired from a prior (legitimate) owner. And I also believe you have the right to dispose of your (alienable) property, even in the future. So you could, by this ability, make up conditional bequests of future property and you could effectively privately create something almost identical to what we call “enforceable contracts” today. Except that there are, under my theory, no dilemmas about things like, say, why you can or cannot sell yourself into slavery. (All this will be worked into my book I am working on, Estoppel: A Theory of Rights, which will elaborate on my earlier Estoppel article.) The reason you cannot sell yourself into slavery is simply because you do not have the metaphysical ability to currently shackle your future volition. I.e., to sell oneself into slavery, say, in a year’s time, or even right now, the slave S would be owned by O. If S tries to escape, what right does O have to use force against S? Has S used force against O? No, he has not; he has only said something to O (namely: “I will be your slave in a year.”). S clearly does not consent to being imprisoned at the moment O attempts to imprison him; and S has not initiated violence against O which would justify O’s use of force against S. For this reason our own property in our bodies is inalienable. If a person somehow had the ability in the present to force his mind in the future to consent to any orders his master would give him, slavery might be possible; but it simply is not possible to prevent yourself in the future from objecting to violence against you. This is similar to legislative supremacy or sovereignty, the idea that the government or legislature of a sovereign cannot bind itself in the future. Even if it passes law x, it can pass another one later. Even if it passes a law saying that no legislature may repeal law x; still, this cannot stop a future legislature from simply voting to repeal it. This is how I view inalienability.

But we can also own property; and this means to be able to voluntarily dispose of it or give it or sell it to someone else. I also believe this right extends to future-acquired property. I.e., I believe that, if A can, by some act, some physically tangible act that others can see (e.g. a written contract) manifest his will to transfer ownership of his house to B; then A can also declare in the act of sale that the time of transfer is, say, one year in the future. Then, one year from that day, B becomes the owner of the house. It is too late for A to change his mind; he no longer owns the house. It is too late for A to change his mind even a month before the planned day of transfer of ownership; for he has already given away the house (just not effective until another month). So after the day B becomes the owner, if A refuses to give it up, he is stealing or trespassing against B’s property. So property that we own, other than our bodies, is alienable.

Anyway, my point is this. For bankruptcy laws, given this framework of rights, people must be clear in their “contracts” what they mean and how they intend to dispose of property. If A says he will repay B $1000 in a year; but then A is bankrupt in a year, then there is simply no property to transfer; it turns out they were talking about something that didn’t exist. Now they can specify in their original contract (which is just a declaration of future conditional transfers of ownership of various property of A) that, if A doesn’t have $1000 on day 365, then any extra money A earns by, say, employment, thereafter, up to $1000, becomes B’s property. Etc. Or they could work out other arrangements. So like you I don’t think there should be a specific bankruptcy law, other than standard security devices and contract law (except consistent with my understanding of the proper justification for the enforceability of contracts). The law should allow and enforce private, voluntary dispositions of property. I agree that this will be “efficient,” in some sense, just as all values are satisfied and pursued more “efficiently” the freer that people are to pursue them.