Default

Default summary:

• Default happens when you stop paying a debt for an extended period, in violation of your agreement with the creditor.

• Defaulting on a loan could hurt your credit, cost you money in fees and interest, and put you at risk of being sued for the debt.

• It may be possible to avoid defaulting by restructuring the debt through consolidation or debt resolution. 

Default definition and meaning

Default is the failure to repay debt. When you default on a loan or other debt, you've stopped making payments and are no longer meeting the obligations of your loan agreement. Typically, you must have missed payments for an extended period for your debt to be considered in default. The results of defaulting could include damage to your credit, having your unpaid debt sent to collections, and legal issues.

Key concept: Default occurs when you stop making payments on debt that you owe.  

Default: a comprehensive overview 

Defaulting means you’ve failed to meet the terms of your loan agreement. When you don't make payments on a debt, your account may go into default. Default usually doesn’t happen right away. Typically, you must miss payments for a few months or longer before your account is in default. 

When you default on debt, your credit is likely to suffer, which could impact your ability to qualify for credit in the future. Another consequence that you may face is a debt lawsuit. Your lender could take you to court to recover the outstanding debt. If they win, they could get permission to garnish your wages or your bank account.

Defaulting on a secured debt

Some debts are secured. That means the debt is guaranteed by something of value that the lender could take and sell if you default. For example, a car loan is secured by the car.

With secured debts, you could lose the asset if you fail to meet the conditions of your loan agreement. If your mortgage is in default and you don’t reach an agreement with your lender to get caught up, you could lose your home and be forced to move out. 

Defaulting on an unsecured debt

Unsecured debt isn’t guaranteed by anything that the lender could sell. Credit cards are an example of unsecured debt. It’s common for unsecured defaulted debt to be sent to collections. If this happens, you could be subject to constant phone calls and online messages attempting to get you to pay your debts. 

The best way to avoid defaulting on a loan is to make on-time payments. One missed payment likely won’t put you at risk of default. But falling behind could make it hard to get caught up. If you miss multiple payments, you may default. 

Real-life examples of default

These are examples of the things you should do if you want to avoid defaulting on a debt: 

• Make your mortgage payments 

• Pay your credit card bills 

• Make payments on your personal loan 

• Pay your student loans 

• Communicate with your lender and work out a plan if you’re struggling to stay caught up and on time.

How to avoid defaulting on a loan 

If you do find yourself struggling, these strategies could help you avoid defaulting on a loan. 

Ask about deferment

If you’re experiencing a financial hardship, your lender may allow you to defer payments for a short time. Loan deferment allows for a temporary pause on payments. While interest will continue to accrue, you could take a break from making payments during the deferment period. This is only a temporary solution, but it could help you avoid default while you get your finances in order. 

Negotiate the debt

Another tool that could help you avoid defaulting is debt resolution. The way debt resolution works is that you and your creditor reach an agreement to close out the debt for less than the full amount you owe. The rest is forgiven. Anyone can negotiate with creditors. You also have the option of working with a professional debt resolution company that can negotiate on your behalf. Debt resolution could help make your debt more manageable.