The document explains the meaning and implications of default in finance, defining it as the failure to meet legal obligations of debt contracts. It distinguishes between types of defaults, such as debt service default and technical default, and clarifies the differences between default, insolvency, and bankruptcy. Additionally, it outlines various forms of default behavior, including strategic and consumer defaults.

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Introduction
to Default

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Introduction
 In finance, default occurs when a debtor has not met his or her legal obligations
according to the debt contract, e.g. has not made a scheduled payment, or has violated
a loan covenant (condition) of the debt contract.
 A default is the failure to pay back a loan.
 Default may occur if the debtor is either unwilling or unable to pay his or her debt.
 This can occur with all debt obligations including bonds, mortgages, loans, and promissory
notes.
Types of default
Default can be of two types:
Debt services default:
Debt service default occurs when the borrower has not made a scheduled
payment of interest or principal.
Technical default: Technical default occurs when an affirmative or a negative covenant is
violated.

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Distinction from Insolvency and Bankruptcy
Default
• "Default" essentially means a debtor has not paid a debt which he or she is required
to have paid.
Insolvency
• "Insolvency" is a legal term meaning that a debtor is unable to pay his or her
debts.
Bankruptcy
• "Bankruptcy" is a legal finding that imposes court supervision over the financial
affairs of those who are insolvent or in default.
The term default should be distinguished from the terms insolvency and bankruptcy:

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Types of Default
 Sovereign defaults:
Sovereign borrowers such as nation-states generally are not subject to bankruptcy
courts in their own jurisdiction, and thus may be able to default without legal consequences.
 Orderly defaults: In times of acute insolvency crises, it can be advisable for regulators and lenders to
preemptively engineer the methodic restructuring of a nation's public debt also called
"orderly default" or "controlled default".
 Strategic default: When a debtor chooses to default on a loan, despite being able to service it (make
payments), this is said to be a strategic default. This is most commonly done for non-
recourse loans, where the creditor cannot make other claims on the debtor
 Sovereign strategic default:
As with Strategic default when a debtor chooses to default on a loan sovereign borrowers such as natio
n-states also can choose to default on a loan.
 Consumer default
Consumer default frequently concern arrears in rent or mortgage payments, consumer credit, or utility
payments.

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