DEFINITION OF DEFAULT

By | June 26, 2022

Default is a term that is not part of the dictionary of the Royal Spanish Academy (RAE), although it is frequently used in our language. It is an English word whose literal translation refers to something that is done by default or by default.

Its most common use in Spanish, however, is different. Default occurs when a debtor fails to make the corresponding payments to its creditor. In this way, the debtor falls into the cessation of payments or default.

Default occurs when a company, a person or a State does not have liquid money (in cash) to meet its debt. By declaring default, the debtor seeks to reach an agreement with its creditors to define how to make the pending payments. These negotiations take place within a legal framework, with external supervision by the judicial bodies.

  • Abbreviationfinder: Find definitions of English word – Tamil. Commonly used abbreviations related to word are also included.

In addition to all of the above, we could highlight other data of interest related to this suppression of payments or default:

  • It can occur with both loans and mortgages or even bonds.
  • Sometimes default is used as a synonym for insolvency, but that is a mistake. These are two legal situations that take as their starting point the fact that the debtor cannot make the payments that are pending with the creditor. However, in the case of default it is because the debtor has assets but they are not liquid enough, while in insolvency the debtor is directly unable to pay the debts he has.
  • The most common is to use default to refer to the so-called “sovereign debt”, that is, when a specific government decides not to pay the external debt it has.

It is important to clarify that when a State decides to opt for this measure, it has previously had to consider the consequences that it would bring, such as the reduction of profits from international trade.

Regarding this last type of suppression of payments, it must be established that there have been many examples throughout the centuries. Thus, France carried it out a total of eight times during the period between the years 1500 and 1800.

In the current decades or closer, this phenomenon has also occurred, also known as “sovereign default”. This would be the case of Uruguay in 2001, Ukraine in 1998, Russia in 1998 or Argentina in 2001.

It is important to bear in mind that, when the debtor declares its default, it is informing that it does not have liquidity to assume its debt, without this meaning that it is in a bankruptcy situation. In other words: the debtor does not have money to give to the creditor, but he does have other assets (such as real estate ). In this way, default is a temporary suspension of payments, unlike bankruptcy, which implies an irreversible situation.

The default, in short, can be resolved through an agreement (which may include a modification of the maturities or even a removal of the amount of the debt so that the debtor can resume his payments) or the liquidation of the assets of the person who owes.

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