The concept of default differs according to the creditor and debtor parties. So what does default mean? What do concepts such as default and default interest actually mean?
What is Default?
Default is the situation in which a borrower is unable to pay his debt in an unlawful manner. The concept of default occurs when one of the creditor or debtor parties fails to fulfill their responsibilities duly on time. Default has two basic types in law. These are separated from each other as the default of the creditor and the default of the debtor. If the debt that is intended to be performed in accordance with the conditions determined by the debtor is not accepted by the creditor, this is called creditor default. The inability of the debtor to pay his debt on time is a situation defined as debtor default.
What Does It Mean to Default?
Default is the definition that occurs when the debtor is unable to pay his debt on time. Here, the concept of default should not be understood as going bankrupt and never being able to pay the debt. In cases where the debtor cannot pay all or part of its debt in due time, it is in default.
What is the Probability of Default?
The possibility of default by the parties can be foreseen. The definition of default is shaped by the asset class, the rules of the regulatory authority, and the terms of the borrowing agreement. For this reason, the underlying causes of the default should be examined while calculating the probability of default. The probability of default is the situation in which the probability of the debtor's default in the future is foreseen as a result of the evaluations made in line with the current conditions.
What is Default Interest?
Default interest is the interest that must be paid in case of a default regardless of whether a loss occurs or whether the debtor is at fault or not. In order for the default interest to be claimed, a monetary debt must be formed and the default must occur.
What are the Criteria for Default?
In order for the debtor to be deemed unable to pay his debt, certain criteria must be observed. These criteria are as follows:
1. Having financial difficulties
Financial difficulty is the deterioration of the liquidity balance in the company's activities. Examples of this are the problems occurring in receivables management, negative divergences in financial structure ratios, and imbalances in management and partnerships. The greater the financial difficulty, the greater the risk of default.
2. Having technical difficulties with payment
It is the inability to pay the due debts due to reasons such as the assets owned by the company are smaller than the debts, the loss of the company exceeds its equity.
3. Debt restructuring
Restructuring are improvements that borrowers have to make in order to overcome their financial difficulties.
The default rate increases for companies that are exposed to one or all of these challenges.
Default in Exchange Transactions
Takas Bank issues a legal warning to the investor, who has a collateral deficit as a result of stock market transactions, in order to close this deficit and gives a certain period for the said debt. If the investor cannot pay the debt within the given period, the investor's account will be in default. If the debtor pays his debt immediately after the default, he will be in the first default and the investor's account will be charged one fold of the highest rate according to the current interest rates. If the debtor fails to pay the debt immediately after default, the investor's account falls into a second default. In this case, three times interest is applied to the investor.
What Happens If Default Obligations Are Not Fulfilled?
- In case of default for one of the parties, the defaulting party may take the following steps:
- Open positions can be liquidated by the relevant exchange or member during the session.
Takas Bank can convert the collateral into cash.
If the debtor has not fulfilled its obligations despite the above-mentioned steps, Takas Bank may apply to obtain the conditions and receivables of the relevant member determined within its own body.
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