If I loan you $10 and you don't repay it, it's never going to be worthwhile for engage the legal system to reclaim that money. If there's no realistic threat of coming after somebody for $10, then no $10 loans will be offered. I think it's nice to have an environment where legal remedies are accessible to everyone for little to no marginal cost. It promotes pro-social behavior if everyone knows that everyone knows that contracts are always enforced regardless of the economic standing of the participants.
Except clearly that doesn’t work, and clearly some people who take out loans like this aren’t doing it in bad faith. The idea that the threat of punishment is effective at stopping “bad” behavior has, I believe, been thoroughly debunked by psychology. It’s not as simple as “someone borrowed $10 and didn’t pay you back”, typically. Even personal bankruptcy is available to people who borrowed in good faith and couldn’t make the ends meet. But when there is an entire system that is designed and exploited to make it hard or impossible to pay people back (e.g. payday loans or usurious rental contracts), no amount of punishment will get the desired behavior you want because the system itself is broken.
If I loan you $10 and you don't repay it, it's never going to be worthwhile for engage the legal system to reclaim that money. If there's no realistic threat of coming after somebody for $10, then no $10 loans will be offered. I think it's nice to have an environment where legal remedies are accessible to everyone for little to no marginal cost. It promotes pro-social behavior if everyone knows that everyone knows that contracts are always enforced regardless of the economic standing of the participants.