My brother has been a professional rock musician for almost two decades. Several of his bands have broken up after one or two albums, the recording of which was financed by their label. In those cases, the label simply takes a loss. They're not sending debt collectors out or something.
The recouping terms are set in the contract. It's not conceptually different from the term sheets that govern how and when investors will be paid back when they invest in Internet startups.
There are examples of bad labels screwing artists, and there are examples of good labels supporting artists. The terms, not the concept, of recouping are what it make it good or bad.
Ironically, the more exploitative labels are the ones that have done better under the pressure of piracy, because they are more willing to force bands into "360" deals where every revenue stream is subject to recouping: merch, sync, publishing, tours...basically they own the artist. So they're not hurt much by piracy.
But this is not how all label deals are done. Many smaller and mid-size labels have historically limited their deals and depended more on album revenue. These are the folks--the good, artist-supporting folks--who are being most hurt by piracy.
