What is a Default?

Default is the failure by a debtor to make a principal or interest payment in a timely manner. The result can be the loss of collateral or even a bankruptcy filing by the debtor. This situation occurs when the cash inflows of a business are exceeded by its cash outflows, leaving no cash with which to make debt payments. A default can also arise when a borrower breaches a loan covenant, such as when it reports a debt-to-equity ratio that is worse than the minimum level set by the lender.