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Default is when a debtor has not paid a debt which was required, or has otherwise violated a condition of the debt contract. Two kinds of default exist: debt service default, and technical default. Debt service default takes place when the one who has borrowed does not make a scheduled payment. Technical default occurs when a condition (covenant) of the debt contract is violated.
Covenants may be either affirmative covenants or negative covenants. Affirmative covenants require that the borrowing party retains a specific level of capital or financial ratios. Negative covenants restrict or prohibit certain actions which might be damaging to the position of the creditors.
Default is contrasted from both insolvency and bankruptcy. Insolvency means that the debtor is not able to pay his debts. Bankruptcy means that court supervision is placed over financial matters involving the one who is either in default or insolvent.
Default can occur in virtually any debt situation. Bonds, loans, mortgages, and promissory notes are some examples. If the debtor does not repay, whether due to being unable or unwilling, then default has occurred. Likewise, the default status exists if a condition is violated, under which the debt is present.
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