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Loan Default
In
finance, a default occurs when a debtor has not met its legal obligations
according to the debt contract, in the sense that it has not made a
scheduled payment, or violated a covenant or conditions of the debt
contract. A default tends to occur if the debtor is
either unwilling or unable to repay
their debt. This can occur with all debt obligations including bonds,
mortgages, loans as well as promissory notes.
The term default
should however be distinguished from the terms insolvency and bankruptcy.
'Default' essentially means that a debtor has not paid a debt. On
the other hand, 'Insolvency' is a legal term meaning that a debtor is
unable to pay his debts while 'Bankruptcy' is a legal finding that imposes
the court's supervision over the financial affairs of those who are
insolvent or are in default.
In corporate finance,
the holders of the debt will normally seize the collateral securing the
debt, or file in court to force bankruptcy immediately after a default
occurs, or both. A technical default is an almost meaningless term, since
all defaults invariably involve a technical breach of the debt contract,
but could also indicate that the debt holders do not consider the default
to be serious or else, that they expect to be able to collect more by
negotiating an informal bankruptcy than by going through the legal system.
In most cases of debt, including corporate debt, mortgages and bank loans,
the total amount owed becomes immediately payable on the very first
instance of a default of payment. Typically, if the debtor defaults on any
debt to any lender, a covenant in the debt contract states that that
particular debt would also be in default and this is referred to as a
cross default. Sovereign borrowers generally are not subject to bankruptcy
courts in their own jurisdiction, and hence may be able to default without
any legal consequences or implications.
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