Default

If the debtor is not able meet the legal obligations according to debt contract, and then default occurs. If the debtor is unwilling or unable to pay the debt then also default occurs. Default can occur with all debt obligations including bonds, mortgages, loans and promissory notes. If the debt is beyond the limits of repayments then there are chances for insolvency or bankruptcy. Debt is something owed by an entity. It can be assts or money. Debt is a means of using projected future purchasing power in the present. When a creditor agrees to lend a sum of assets to a debtor then a debt is created. Many companies use debt as a part of corporate finance strategy. Debt is normally given with expected repayment along with interest. Several kinds of debt are used by companies for financing operations.

Types of default

Defaults are of two types; debt services default and technical default. If the borrower is not able to make the scheduled payment of interest or principal, then debt service default occurs. When positive or negative contract is violated, then technical default occurs. Clauses in debt contract that require firms to maintain certain levels of capital or financial ratios are known as affirmative covenants. Tangible net worth, working capital and debt service coverage are the most commonly breached restriction in affirmative or positive covenants. Clauses in debt contract that restricts corporate actions are called negative covenants. It can be continuous or incurrence based. When compared to affirmative covenants, violations of negative covenants are rare. If a debtor defaults on loan even if he is able to make payment, this is said to be a strategic default.

Default Notice

Creditors are supposed to issue a default notice to customer who did not make payment to their account, before pursuing legal actions to recover the owed money. Certain information’s have to furnished on default notice without fail. Name and addresses of both creditor and borrower have to be mentioned in the notice. Agreement type and agreement breach details, settlement figure, action required by the borrower to remedy the situation have to be furnished on the default notice. The borrower has 7 days from the issue of default notice to repay the amount. The creditor cannot take the debtor to court in these 7 days. Borrowers can seek the advice of professionals to negotiate with creditors and to establish a regular and realistic repayment plan.

Questions:

• What is default?
• What is default notice?