When an individual, a company or a State does not have liquid money to pay a debt, they can declare default.
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 in a predetermined manner .
Its most common use in Spanish, however, is different. Default occurs when a debtor stops making payments to his creditor. In this way, the debtor falls into default or default.
When the default occurs
Default occurs when a company , a person or a State does not have liquid money (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 are carried out within a legal framework, with external supervision by the justice bodies.
Unlike bankruptcy, default involves a temporary suspension of payments.
Other information of interest about the suppression of payments
In addition to everything stated above, we could highlight other data of interest related to this suppression of payments or default:
• It can occur with loans, 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 meet the payments pending with the creditor. However, in the case of default it is because the aforementioned debtor has assets but they are not sufficiently liquid, while in insolvency the debtor is directly unable to pay the debts it has.
• The most common thing 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 owes.
Default of a State
It is important to clarify that when a State decides to opt for this measure, it has first 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 over the centuries. Thus, France carried it out a total of eight times during the period between the years 1500 and 1800 .
In the current or more recent decades, this phenomenon, also known as sovereign default , has also occurred. This would be the case of Uruguay in 2001 , Ukraine in 1998 , Russia in 1998 or Argentina in 2001 .
A temporary situation
It is important to keep in mind that, when the debtor declares default, he is reporting that he does not have the liquidity to assume his debt, without this meaning that he 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 reduction in the amount of the debt so that the debtor can resume payments) or the liquidation of the assets of the person who owes it. .