Default

Business, Legal & Accounting Glossary

Definition: Default


Quick Summary of Default


Default in economics can be referred to as a condition that arises when any debtor is unable to pay back the debt in accordance with the legal obligations of the debt contract. Any organization or individual can be termed as a defaulter if it is unable to pay a scheduled sum of money or desecrated a credit agreement. Condition of default can arise in any kind of debt contract like bonds, loans, mortgages and promissory notes.



What is the dictionary definition of Default?

Dictionary Definition


Failure to meet obligations as they fall due for payment.

  1. finance The condition of failing to meet an obligation.
  2. electronics, computing the original software programming settings as set by the factory
  3. A loss incurred by failing to compete.

A failure to perform a legal duty. For example, a default on a mortgage or car loan happens when you fail to make the loan payments on time, fail to maintain adequate insurance or violate some other provision of the agreement. Default on a student loan occurs when you fail to repay a loan according to the terms you agreed to when you signed the promissory note, and the holder of your loan concludes that you do not intend to repay.

  1. n. failure to respond to a summons and complaint served on a party in the time required by law. If a legal answer or other response is not filed, the suing party (plaintiff) can request a default be entered in the record, which terminates the rights of the defaulting party to defend the case. Under a unique New York statute, a default can be taken by failure to respond to a summons served without a complaint.
  2. the failure to make a payment when due, which can lead to a notice of default and the start of foreclosure proceedings if the debt is secured by a mortgage or deed of trust.
  3. v. to fail to file an answer or other response to a summons and complaint, or fail to make a payment when due.

Full Definition of Default


A default can be generally defined as a failure of a debtor to make timely payments of principal and interest.

Thus, when one is in default, a person or a company is said to default on a loan or other official financial obligation. Default also occurs when a debtor fails to sufficiently meet any timely provisions of a bond, mortgage, lease, or futures contract. Before extending credit, banks, lenders, as well as debt and equity issuing entities take into consideration default risk, i.e. a possibility that a company or an individual will not honour a debt commitment. Some borrowers with higher-than-average default risk must pay a compensatory default premium. Default premium would constitute a higher bond yield offered by a company with scanty financial tenets. Default premium is also frequently paid by individuals with poor credit, typically in a form of above-market interest rates.

Reasons For Default

One of the major reasons for the occurrence of default as discussed earlier is the failure of the borrower to pay back the money. It can be referred as breach of debt contract, according to which certain amount of money was to be paid after a scheduled period of time. Apart from this, there can be several other reasons also like borrower may fail to sustain insurance, the borrower sells good against which mortgage loan is obtained or can transfer ownership to any other person.

Default And Types

Talking about default we can distinguish it into two basic types namely debt services default and technical default. Debt services default is a condition that can occur when a borrower is unable to pay the scheduled sum of money with interest or even principal amount. State of technical default arises due to violation of an affirmative or a negative contract.

An affirmative covenant is known as a clause in any debt contract, according to which any firm borrowing money has to sustain definite levels of capital or fiscal ratios. Most vulnerable restrictions that are violated in any affirmative covenant include restrictions imposed on operational capital, short term liquidity and debt service coverage all of real net value. Clauses in debt contract that imposes a limitation on corporate actions are termed as negative covenants. Negative covenants are enforced on sales of assets and payment of dividends.

Legal Proceedings For Default

This section explains legal proceedings that can be done in order to get rid of any default organization. Actions initiated by the court in case debtor is unable to pay the debt. There are certain clauses that are to be satisfied first before initiation of any kind of legal actions on the defaulter.

  • The debtor must overdue amount for payments
  • The debtor must be given appropriate time to pay back the debt
  • The debtor is not reachable, i.e. after reasonable efforts of contacting debtor; it is not possible to get hold of the debtor

Examples of Default in a sentence


He failed to make payments on time and is now in default.
You may cure this default by paying the full amount within a week.


Synonyms For Default


failure, nonpayment, neglect, lack, arrears

Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/default/
Modern Language Association (MLA):
Default. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. February 25, 2021 https://payrollheaven.com/define/default/.
Chicago Manual of Style (CMS):
Default. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/default/ (accessed: February 25, 2021).
American Psychological Association (APA):
Default. PayrollHeaven.com. Retrieved February 25, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/default/

Definition Sources


Definitions for Default are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 27th April, 2020 | 4 Views.