Default is the occurrence of an event or circumstance against which a party to a
contract
A contract is an agreement that specifies certain legally enforceable rights and obligations pertaining to two or more parties. A contract typically involves consent to transfer of goods, services, money, or promise to transfer any of thos ...
seeks protection.
For example, a contract may state that the recording of a
lien
A lien ( or ) is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the ''lienee'' and the pers ...
against certain
property
Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right to consume, alter, share, re ...
is a
default. 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 Loan, borrowed or otherwise withheld from another party, the creditor. Debt may be owed by a sovereign state or country, local government, company, or an individual. Co ...
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 t ...
facility, the occurrence of an event of default normally also allows the
lender 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 thi ...
has been put into
liquidation
Liquidation is the process in accounting by which a Company (law), company is brought to an end. The assets and property of the business are redistributed. When a firm has been liquidated, it is sometimes referred to as :wikt:wind up#Noun, w ...
: 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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