Default (Insolvency) — What is it?
Default, or insolvency — definition, causes and consequences. What does default mean for borrower and investor?
Definition
Default (insolvency) — situation where debtor fails to meet loan or bond agreement terms. May mean missing payment, covenant breach or bankruptcy declaration.
Types of default
Technical default
Breach of agreement terms other than payment failure — e.g., exceeding debt ratio specified in contract.
Actual default (payment default)
Failure to timely pay principal or interest. Usually after 90 days delay, bank classifies loan as "default".
Sovereign default
State insolvency — e.g., Argentina (2001), Greece (2012). Means failure to pay government bonds.
Default consequences
For borrower
- BIK entry — credit score reduction for years
- Loan agreement termination
- Debt collection and bailiff enforcement
- Loss of collateral (e.g., property)
For bond investor
- Loss of part or all invested capital
- Debt restructuring process (haircut)
- Need for portfolio write-downs
How to avoid default?
- Safety cushion — 3–6 months of expenses
- DTI < 35% — don't overdo obligations
- Income loss insurance — policy for job loss
- Bank contact — when having problems, negotiate restructuring BEFORE entering default
How Freenance can help
Freenance monitors your obligations and cashflow. If financial runway drops below safe level, you get warning — before default risk appears.
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