Default (finance)
From Wikipedia, the free encyclopedia
In finance, default occurs when a debtor has not met its legal obligations according to the debt contract, e.g. it has not made a scheduled payment, or violated a covenant (condition) of the debt contract. Default may occur if the debtor is either unwilling or unable to pay their debt. This can occur with all debt obligations including bonds, mortgages, loans, and promissory notes.
The term default should be distinguished from the terms insolvency and bankruptcy. "Default" essentially means a debtor has not paid a debt. "Insolvency" is a legal term meaning that a debtor is unable to pay his debts. "Bankruptcy" is a legal finding that imposes court supervision over the financial affairs of those who are insolvent or in default.
In corporate finance, the holders of the debt will usually 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 involve a technical breach of the debt contract, but may indicate that the debt holders do not consider the default to be serious (a rare occurrence) or that they expect to be able to collect more by negotiating an "informal bankruptcy" than by going through the court system.
With most debt (including corporate debt, mortgages and bank loans) the total amount owed becomes immediately payable on the first instance of a default of payment. Generally, if the debtor defaults on any debt to any lender, a covenant in the debt contract states that that particular debt is also in default. This is referred to as cross default.
Sovereign borrowers generally are not subject to bankruptcy courts in their own jurisdiction, and thus may be able to default without legal consequences.
