Your credit score (and collateral, if it's a secured loan) is your incentive to repay the debt at face value. So I disagree that people would choose to default

Your credit score (and collateral, if it's a secured loan) is your incentive to repay the debt at face value. So I disagree that people would choose to default just because they can get it for pennies on the dollar. And given the ability of people to do that would be rather limited (as after the first time they'd have shot their credit score) it doesn't seem like it would create any sort of unworkable problems for the industry.