Default is the occurrence of an event or circumstance against which a party to a
contract seeks protection.
For example, a contract may state that the recording of a
lien against certain
property is a
default
Default may refer to:
Law
* Default (law), the failure to do something required by law
** Default (finance), failure to satisfy the terms of a loan obligation or failure to pay back a loan
** Default judgment, a binding judgment in favor of ei ...
. If the default is left uncured after
notice and the passage of time, it may ripen into an event of default, which creates in the non-defaulting party certain rights, such as acceleration of a
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The d ...
or the right to exit a contract.
In a
revolving credit
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. Credit cards are an example of revolving credit used by consumers. Corporate revolving credit facilities are typically used to ...
facility, the occurrence of an event of default normally also allows the
lender
A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
to cancel any obligations to make further loan advances.
There are three types of event of default:
* payment default, i.e. the failure to pay
principal or interest when it falls due for payment;
* prospective default, when payment is not yet due, but it is clear that it will not be capable of being paid when it does fall due. For example, a payment is due in three months' time but the
borrower
A debtor or debitor is a legal entity (legal person) that owes a debt to another entity. The entity may be an individual, a firm, a government, a company or other legal person. The counterparty is called a creditor. When the counterpart of this ...
has been put into
liquidation: and
* covenant default, when the borrower fails to keep a promise (a covenant) that it has made in the contract.
Credit
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