With the subprime crisis raging, there are many stories of people walking out of their mortgage. It also seems that it is not uncommon among young people to walk out of a mortgage before the first payment thus getting one year of free rent (credit re-building apparently not being an issue at a young age).

In a free and just society, there cannot be compulsory personal bankruptcy law. Maybe debtors buy as an insurance the right to default, maybe they don’t and they go to debtor’s work camp. In the U.S. the state allows anyone to declare personal bankruptcy.

According to two different analyses of the law I reach two opposite conclusions.

a) Defaulting on a debt is theft, the creditor should be able to sue and settle an agreement where the debtor repay some or all of the debt (through total liquidation of assets, work, etc). This is prevented by the government, thus creditors charge a higher interest rate, covering default risk as a defense against this aggression. The higher rate does not legitimate defaulting, much like the shop raising its prices to account for stolen goods does not justify shoplifting (this is Rothbard’s position).

b) The State force creditors to bundle their service with a default insurance. When someone contracts a debt, he is buying the insurance as well through higher interest rates. Defaulting (or walking out of a mortgage) is merely exercising an option that was bought.

This same ambiguity can be applied to many different laws, such as zoning laws. If I bought a house close to a school, is building a peep-show ok because zoning laws are coercive, or is it not okay because the State prevented me from buying the right-to-build-a-peep-show from the original owner (who died with no heir thus destroying that right)?

So, is walking out of a mortgage a rational arbitrage or a fraudulent theft?