Definition
A default is the failure of a borrower to repay a debt according to the terms of the credit account.
Analysis
A credit card account is legally considered to be in default once it is 180 days delinquent. That means that the required minimum payments have not been made according to the terms of the cardholder agreement so that the cardholder is 6 months behind on payments.
The Comptroller of the Currency requires credit card issuers to classify accounts in default as bad debt expenses. This means that they can no longer claim the accounts as collectible assets. The purpose is to eliminate accounting irregularities and to accurately measure a card issuers collectible assets as well as its bad debts.
The result is that an account holder that allows a credit account to go into default can no longer deal directly with the credit card issuer. Instead, the account will typically be sold to the highest bidding debt collector that will then pursue repayment of the bad debt.
A mortgage loan in default is treated differently, as it must undergo a legal process known as foreclosure. The timeframe for disposal of the bad debt can be substantially longer than 6 months in many cases. A foreclosure sale could be used to repay most or all of the balance of the mortgage loan.
A car loan in default can result in repossession by the lender in order to limit loan losses. Repossession can occur much quicker, often after just 1 to 3 missed payments. The car may be auctioned to help repay the loan balance. Rarely does an auction fully repay the loan balance, and the former car owner may still be assessed the remaining deficiency.
Defaults are recorded in an individual’s credit history, and they cause a drop in credit scores. Uncorrected defaults will eventually drop off of a credit report after 7 years.
