What is a Default in Credit Finance

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A popular definition of financial default is repayment failure of the debtor in spite of reminders and demands. However, it does not match with the legal context, but reflects a basic idea of the phenomenon. The debtor default triggers different legal consequences, particularly the compensation obligation of the debtor.

The difference of default with bankruptcy is that the debtor may still have sufficient assets to meet the debts, but the assets are not liquid enough. In some instances, the debtor may have property or assets worth more than his/her debts, but just can not pay the outstanding debts at the time.

Default could be in the form of debt services default or technical default, and debt service default refers to the cases when the borrower fails to effect due payments. On the other hand, technical default occurs whenever a positive or a negative covenant is breached.

A default notice is often indispensable, and the consequences of delay are centered in the recourse obligation of the debtor and the debtor has to pay compensation for delay in damages.

Legal proceedings associated with default can be different in various countries’ specific regulations. But generally, default leads to instigation of litigation measures that could result in the liquidation of assets of the borrower, these actions are usually more drastic. And the individual or company will consequently experience such unpleasant measures depending on the amounts involved.

With the majority of debt which extends to bank loans, mortgages and corporate debt; a covenant is incorporated in the debt contract. It implicates the borrower in that the total amount owed has to be paid in the event of the first default of payment.

In corporate finance, the lenders will generally initiate litigation proceedings or foreclosures on any collateral securing the debt. Even if the debt is not secured by collateral, lenders can still sue for default to ensure the debt is repayed. To have a chance of avoiding such extreme actions a debtor can keep his/her predicament well communicated with the lender, but suspension of drastic action cannot last forever as long as the debt is not paid.

Payment delays by the debtor can also be regarded as subjective distortion, if the borrower displays evasive tendencies. The lender enjoys superior rights in the credit arrangement, and the debtor still has to meet compensation obligations despite any other rights accorded to him according to the law.

In the event of a withdrawal from the credit contract, the creditor can claim damages for breach of contract, while upholding the stipulations laid out in the contract. The creditor can demand compensation for those costs and damages he has incurred due to late payment.


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